The truth is it is possible to beat the market but you shouldn’t pay an arm and a leg every year to a hedge fund manager who has only 1-2 good ideas that perform very well and invest the rest of his assets on large-cap stocks where he can’t outperform the market after mind numbingly high fees. This is the point Warren Buffett is making. He probably thinks that most investors won’t have the discipline to stick to a strategy (i.e. imitating his top stock picks or investing in the best ideas of hedge funds like we do) and the best alternative for these people who do the wrong thing at the wrong time is investing in a “very low-cost index fund”.
If an investor has the discipline to stick to a strategy, then there are better alternatives. Buffett should have qualified his recommendation. By not qualifying his recommendation, he gave bad advice to disciplined investors. Let’s take a look at one of these alternative strategies that we shared with our subscribers.
Creating an equal weighted portfolio of Buffett’s top 5 positions would have returned 66 basis points per month between 2008 and 2012. A very low-cost index fund returned 29 basis points per month during the same period. You probably noticed that an equal weighted portfolio generated slightly better returns than Buffett’s value-weighted portfolio (66 basis points per month vs. 58 basis points per month). This means investors would have outperformed the market by more than 4.5 percentage points per year by buying Buffett’s top 5 picks. This 5 stock portfolio also had lower volatility (risk?) than the market and produced a monthly alpha of 55 basis points. Its market beta was 0.78. These are great numbers. If you believe that these stocks will keep outperforming the market over the long-term (Buffett does, that’s probably why he keeps buying them), you should research them more closely. Let’s go over Buffett’s top 5 picks:
1. Wells Fargo (NYSE:WFC): Warren Buffett had more than $25 billion invested in this banking giant, making Wells Fargo his biggest pick. There are 9 other billionaires with positions in WFC including conservative value investor David Abrams, Stan Druckenmiller, and Ray Dalio. Wells Fargo returned nearly 19% over the last 52 weeks, and is currently trading at a forward earnings multiple of 12.2. Its earnings per share was $1.02 for the fourth quarter, in line with analysts’ estimates. The revenues for the quarter came in at $21.4 billion, up 3.3% on a yearly basis.
2. Coca-Cola (NYSE:KO): is Buffett’s second largest stock pick. Berkshire’s $17 billion is riding on Coca-Cola. Billionaire Ken Griffin boosted his KO bet by 150% during the fourth quarter, whereas Rob Citrone and Israel Englander’s hedge funds initiated new positions in the stock. Among the 700+ equity hedge funds that we track at Insider Monkey, fifty eight of them had investments in the company valued at $22.5 billion. The stock returned 11% over the last 52 weeks.
