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Has the Sage of Omaha Lost His Touch?

In his much coveted annual letter to shareholders Berkshire Hathaway’s Warren Buffett owned up to “subpar performance” in 2012. He acknowledged that his next letter may show that, for the first time, his fund had underperformed the S&P index over a five year period. Should the sage spend more time rediscovering his earlier investing principles and less time promoting President Obama’s tax-hike agenda?

Few American businessmen is as celebrated by the media than Warren Buffett, the 82 year old famed Oracle of Omaha, Neb., known for his stellar long-term record of terrier-like digging-up investments unrecognized by other money managers and producing returns that beat the market.

But Berkshire released its annual report last Friday, and the miracle man proved mortal.

This year’s performance represented an increase in the net asset value of his fund of only 14.4 percent, 1.6 percent less than the rise of the S&P. “Most investors’ timeframe doesn’t last more than 10 years; that’s why smart stock-pickers look at five-year returns, and there Berkshire hasn’t even beaten the total return of the S&P 500 index: It’s up just 16 percent compared to a 32 percent return on the S&P.” writes Fox senior business correspondent Charles Gasparino in the New York Post.

“Buffett doesn’t do much better over three years, up about 23 percent versus 35 percent for the S&P. For 2012 alone, even Buffett concedes that the S&P beat him, returning 16 percent compared to Buffett’s “book value” measurement, which shows a return of 14 percent. ‘If you look at [Buffett’s] performance lately, he’s actually below average,” notes Ed Butowsky, who runs Chapwood Capital Investment Management, which advises clients on where to put their money. “In fact, he isn’t very good at all lately, though he continues to have good PR.’ ”

Yes, there are a lot of numbers that point to Buffett’s continued skill. He prefers looking at Berkshire’s “book value” or the balance sheet value of his assets and comparing that to the S&P and Berkshire is very profitable. In 2012 alone, its net worth rose $24 billion. Buffett for his part offers a somewhat plausible excuse. Operating a fund of around $250 billion is difficult. One needs to generate much higher returns to make an impact.

But as Gasparino observes, “it’s his decision to keep Berkshire so large; he could easily return a nice fat dividend to shareholders, but he’s been loath to do so over the years. And, for all his image as a careful investor, Buffett’s actual investing style is more risky than most people realize, which means his good years need to be higher to compensate clients for the chances he takes on all those “value” investments.”

The secret to Buffett’s investing as the Financial Times’ John Kay observes, is no secret. Berkshire owns a number of insurance companies which throw off considerably cash, since the nature of insurance is that the payment of premiums precedes the payment of claims. These funds together with retained earnings are invested in a portfolio of wholly owned businesses and large holdings in listed companies. The distinguishing chracteristic of most of these companies is that most have a sustained competitive advantage or market position that competitors find difficult to copy. His style is to buy and hold for the long term. As the FT’s Kay suggests, if Buffett is a genius, it is the genius of simplicity.

But has the sage’s reach exceeded his knowledge? As the media’s most famous wealthy liberal, does he gets a pass that other investors don’t? I it time for the octagenerian to pick a successor? Or, as Gasparino argues, is Buffett just spread to thin? “What with all the politicking he’s done in the Obama years. It’s hard to recall anytime in recent memory that any investor has been as politically active as the Obama-era Buffett. With all this support from an economic genius like Buffett, you’d think that President Obama would have the economy on overdrive. News flash: It’s not, and won’t be anytime soon, given all the taxes he has raised and still threatens to raise.”

The numbers don’t lie: When it comes to the economy, Obama is no Warren Buffett. And based on the latest Berkshire returns, even Warren Buffett is no longer Warren Buffett.”


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