Portfolio managers generally have a spotty history of beating the market, but that isn’t necessarily a reason to abandon them, writes Mark Hulbert, a columnist at MarketWatch.
“Is there any foolproof way of telling the difference between an awful investment adviser and a great one who is merely suffering through a lull?” Hulbert asks. “The answer is ‘yes,’ but there’s a catch: An investment adviser has to produce many, many years of mediocre performance before a statistician can conclude, at the 95 percent confidence level, that he has lost his touch.”
He cites the example of Warren Buffett, who many consider to be the greatest investor of all time. But the head of Berkshire Hathaway has gone through periods of when his value-seeking style hasn’t been the broader market.
Berkshire stock has lagged the S&P 500 by 2.7 percentage points a year for the past eight years. Since bottoming in March 2009 as the U.S. economy shrank, the stock benchmark has more than tripled in value as equities became very expensive compared with their earnings.
“You should focus on performance over a many-year period,” Hulbert says. “Though there is no magical threshold for this period’s length that does the trick, in general it should be at least 10 to 15 years. After all, as we saw in the case of Mr. Buffett, an 8-year track record would have you fire Mr. Buffett.”
Berkshire shares could see double digit gains over the next year and a half even if the legendary chairman and chief executive decides to retire, a report in Barron's financial newspaper said.
The company's Class A shares could have an upside of 15 percent to 20 percent through the end of 2018 based on likely growth in its book value, given the company's diversified earnings stream, long-term focus and nearly $100 million (76.7 million pounds) in cash and securities, Barron's said in its May 22 edition.
Barclay's analyst Jay Gelb forecast Berkshire's book value rising 9 percent to 10 percent annually over the next two years, Reuters reported.
Buffett's eventual successor is likely to begin paying a dividend and be more aggressive in buying back shares, the report predicted. Barron's sees Berkshire Hathaway Energy head Greg Abel as the most likely person to be tabbed to "step into Warren Buffett's legendary shoes."
Berkshire shares, which rose 23 percent in 2016, are flat this year after giving back gains seen earlier during the post-election rally. They closed at $244,910 on the New York Stock Exchange on Friday, according to Reuters.
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