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How To Build A Portfolio That Outperforms Berkshire’s
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A portfolio that outperforms Berkshire Hathaway… BRK has become virtually unmanageable… Pulling winners from the list of Wealth Creating Machines… An all-new portfolio that mostly follows the Berkshire allocation model… The dollar and 10-year yield diverge… |
Editor’s Note: In last Friday’s Daily Journal, I shared some surprising research showing that because of huge potential losses at Berkshire Hathaway Energy and large recognized losses at Kraft Heinz and Precision Castparts, Berkshire Hathaway’s (BRK) private investments have been, on a net basis, money losers over the past 25 years. I’d recommend reading that article before you read today’s Daily Journal, as without that context, what I’m suggesting below won’t make as much sense. – Porter
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At first glance, the idea that you could build a portfolio that would reliably outperform Berkshire Hathaway (BRK) seems ridiculous.
For decades, Berkshire was a free and easy way to beat the market consistently. Thanks to Berkshire’s huge insurance company float (now over $170 billion), Berkshire was a leveraged bet on Warren’s “alpha” – his legendary ability to make great investments.
But over the last 25 years, as Berkshire has grown to become virtually unmanageable (it’s a $1 trillion market-cap business!), its relative performance has declined. Likewise, because of the growing portion of Berkshire’s capital that’s locked into regulated and capital-intensive businesses, it’s unlikely that Berkshire will outperform relative to high-quality equity portfolios.
Last week, I offered a list of stocks I feel certain will outperform Berkshire.
These are ultra-high-quality businesses that buy back large portions of their outstanding shares each year. In my mind, this is a virtually fool-proof way to beat the market: these are wealth-creating machines.
One of our analysts, Jared Simons, plugged last week’s list into an equal-weighted portfolio and back-tested it using Bloomberg. The results were better than Buffett: 20% annualized returns with less volatility than the market as a whole (beta: 0.95). The combination of market-beating returns and less volatility led to a Sharpe Ratio of 1.10 for this portfolio (the Sharpe Ratio compares the return of an investment with its risk).
Now, of course, this analysis is rear-looking. A fund like this would be called The Hindsight Fund!