We value-investing folk tend to shower praise on Warren Buffett for being the best investor of all time. Most of us are aware of Buffett's phenomenal track record over the years. You even hear stories about "Berkshire millionaires" -- those lucky few who decided to buy shares in Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) many years ago and are now worth millions because of Buffett's investment savvy.
Yet there are other investors who boast equally good -- some may say better -- investment results than Buffett. Take James Simons, mathematician and hedge fund manager of Renaissance Technologies. Since 1989, his Medallion Fund has averaged more than 35% annual returns after fees, a stunning record. Simon's performance is even more impressive when you consider that he charges a 5% management fee and -- get this -- a 44% incentive fee.
Although the Medallion Fund isn't dealing with the kind of cash that Berkshire is, its $6 billion is nothing to sneeze at. Still, Warren Buffett's skill and investment performance remain unmatched. Here's why.
Not a single down year
Before Buffett was Buffett, he was in Omaha running a private investment partnership. During its 13-year stretch, it never experienced a down year. In fact, his worst year was his last in 1969, when the partnership returned 6.8% while the Dow was down 11.6%.
Performance in bear markets is what really counts, because those are the times in which the most critical aspect of investing -- preservation of capital -- becomes crucial. In 1968, when the Dow was up 7.7%, the Buffett Partnership returned a stunning 58.8%, all without using any options or the degrees of leverage that most funds use today to jack up returns. Yet the rising tide of a bull market enriches just about anyone with money in the market, so bull-market results aren't a good barometer for investment ability. It's when the tide goes out that the approach and discipline count. Or, as Buffett likes to quip, that's when you find out "who's been swimming naked."
So simple, you can explain it in a few sentences
Unlike most hedge funds, Buffett has never hidden his strategy or approach, aside from refusing to discuss what businesses he is buying or selling. His investment achievement is all the more impressive because it didn't require some sophisticated trading strategy or an IQ of 160. While Buffett does participate in more specialized investments like arbitrage, the bulk of his wealth has come from buying blue chips such as Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), American Express (NYSE:AXP), and Gillette, now part of Procter & Gamble (NYSE:PG).
The key, of course, is price. In Coca-Cola, Buffett saw a business with a product that more and more people would consume every year, that would cost pennies to produce on a massive scale, and that would suffer no decline in volume with price increases. He then simply waited for the right price. Doing so is crucial, because even though the opportunity to invest in Coke has been around for decades, buying it in the 1990s was a completely different investment from when Buffett snatched it up in the '80s. So when Mr. Market threw Buffett a fat pitch, he invested some $1 billion -- about 20% of Berkshire's book value -- in Coke.
The numbers say it all
Forget the Buffett Partnerships. Had you arrived to the party late and bought Berkshire in 1965, when Buffett got involved, a $10,000 investment would be worth some $85 million now. The same sum invested in the S&P 500 would be worth about $500,000. This outperformance is all the more impressive considering that most money managers don't beat the index! To top it off, investors in Berkshire have had to pay Buffett only $100,000 a year for his services, an expense ratio of less than 1 basis point given Berkshire's current size. It pays to have managers who eat their own cooking, since they're more concerned with increasing the value of business first and the size of their wallet second -- instead of the other way around.
By any statistical metric, Buffett is the world's greatest allocator of capital. Unlike most hedge funds, he achieved his investment record without any substantial use of leverage or exotic trading instruments. Where they traded at around $7 a share in the 1960s, Berkshire's "A" shares now command a price of more than $120,000 a pop -- and that's a stunning annual rate of return by any measure you choose.
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