Why does the Warren Buffet’s investment approach no longer work?

Warren says you should now own 90% S&P and 10% cash. He goes on to say Berkshire Hathaway’s problem is scalability. Would his approach still work for you? Possibly, but are you a Warren Buffet?

The market has changed over the past 25 years. In ‘98 – ‘00 the S&P return was dividend only of 2% per year. The S&P was unchanged after 12 years. Since then the S&P has risen 13% per year. This 11 percentage point change per year is due to the mag 7 being in the S&P. It also made Berkshire Hathaway’s performance fall because mag 7 stocks were not the style of Berkshire Hathaway.

Warren started buying APPL. It reached a peak of 50% of the company. At that point Berkshire Hathaway’s performance was equal the S&P. APPL was 12 percentage points above the S&P which means the core holdings of Berkshire Hathaway were about 12 percentage points below the S&P.

As the market reached higher and higher valuations, Warren started selling APPL. Currently the holdings are about 50% core holdings, 20% APPL, and 30% cash. The cash and core holdings make it very difficult to beat the S&P unless there is a market correction.

The experience of Berkshire Hathaway is very similar to many investors. I estimate that in a rising market Berkshire Hathaway will underperform the S&P by as much as 9 percentage points per year unless the market broadens out and the value holdings outperform.

Tomorrow I will cover my thoughts on what Greg can do to increase Berkshire Hathaway’s performance.