Warren Buffett’s Secret

Everyone’s favorite investor, Warren Buffett, was the subject of a recent Fortune article titled, “In a first, Buffett gets beat by the S&P 500 over five years. (But wins over six).” In 2013, the article explains, Buffett’s Berkshire Hathaway put up a 23 percent pretax gain versus the S&P’s stellar 32 percent. Over a five-year cycle, Buffett’s record also lags the S&P 500, rising 91 percent versus the 128 percent gain in the index.

As the title of the article suggests, however, there is more to the story. At Balentine, we actually believe that the parenthetical statement of the title is the most relevant part. When comparing Berkshire Hathaway returns over a six-year period spanning year-ends 2007-2013, starting from the peak of the previous cycle, the story changes drastically. “For the entire six-year period, Berkshire’s book value per share rose 73 percent to the S&P’s total return gain of 44 percent,” the article states.

Why is this? The answer is downside protection. During the 2008 financial crisis, the S&P 500 dropped 37 percent, while Berkshire Hathaway’s stock only fell by -9.6 percent. By limiting losses in down markets, Buffett has been able to harness the power of compounding interest – to the tune of nearly 30 percent over the past six years.

At Balentine, we are constantly educating our clients on the importance of an investment philosophy focused on limiting downside capture. By being prepared to give up some of the upside when times are good, we are able to limit the losses on the downside when times are bad, narrowing the range of outcomes and better protecting against permanent impairment of capital.

In today’s world, there is a heightened sense of focus on the short-term – what the stock market has done in the last month or quarter and where it will be next week. In the late 1930s, the average holding period of a NYSE-traded stock was 10 years. Now, however, the holding period is measured in months – not years.

At Balentine, however, we believe in tuning out that noise and taking a long-term, risk-focused approach to investing. While contrarian to the Jim Cramers of the world, we believe this view will have greater rewards in the future, just as it has delivered over several market cycles in the past. After all, just look at Mr. Buffett.

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