September 10, 2018
How do you beat the Market?
Warren Buffet beat the market by a staggering amount. "Between December 1964 and December 2015 Berkshire Hathaway's stock price increased by a mind-blowing 1,000,000% compared to the S&P 500 with a change of 2,300% https://www.businessinsider.com/warren-buffett-berkshire-hathaway-vs-sp-500-2016-2
Clearly, Buffet's returns were extremely high in the first two-thirds of his career. However, if you take a closer look at the last third you will notice his performance is starting to decline (albeit still market-beating). The graph below shows Warren Buffet's relative outperformance to the S&P 500. When https://seekingalpha.com/article/4150977-pretty-picture-buffett-vs-s-and-p-500the y-value of the graph reads 50% this means Buffet returned 50% more than the market for that year.
The linear line in this graph is a linear regression of Buffet's outperformance relative to the S&P 500. This linear regression shows the trend of Buffet's outperformance. As you can see, Buffet's outperformance is declining. There are two possible reasons for this:
As was discussed in the PDF at the top of the page, Buffet's fund is becoming so large that it is becoming the market. In reality, Buffet's fund is nowhere near the size of the market but he has so much money it is becoming increasingly difficult to move it around. Buffet is forced to stay in larger cap stocks so he can close his position in a reasonable amount of time. Larger cap stocks tend to provide smaller returns than small cap stocks.
Second, Buffet relies on fundamental information to make decisions about when to buy or sell stocks. As the world becomes more interconnected via technology, information is spread around the world at the blink of an eye. Everyone has access to the same information at the same time as Buffet. Thus, it is possible it is becoming difficult for Buffet to get an advantage over anyone else.
People still regard Warren Buffet as the Oracle of Omaha (he definitely deserves this title) but many people fail to consider other's who have compounded steady annual returns over a lifetime to make a fortune. When most people think of trading or investing, quantitative trading never crosses their mind even though some of the worlds best traders use quantitative methods. For example, Ed Seykota turned $5,000 into $15,000,000 over a 12 year period using a trend following system. Seykota averaged 60%+ returns over a three-decade period. https://www.turtletrader.com/trader-seykota/
William Dunn is another quantitative fund manager. Dunn has a track record equally as long as Buffet's and with returns just as impressive. https://www.trendfollowing.com/images/brk_dunn.jpg
