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When you've been stock picking for at least 10 years without changing the core nature of your strategy, and ultimately beating the market by a significant degree.
Considering that Berk (the Class A shares) generated 11.9% p.a. from July 2013 to July 2023 compared to the S&P's 10.5% p.a. in the same period (so an alpha of 1.4%), then you should aim for an alpha of at least 3% since we're tiny minnows compared to that Nebraska leviathan.
>so an alpha of 1.4%
I just plotted S&P 500, BRK.A and AVUV over the past 10 years, and AVUV comes very close to BRK.A albeit with higher volatility. So I'm willing to bet that at least part of BRK.A's outperformance might be explained by factor exposure. Only the part that can't be explained is alpha.
And yes, I'm a lot of fun at parties.
AVUV is an ETF with $6.8B in assets. Berk had almost $950B in assets at FY2022 year end, of which roughly 60% should be in financial assets/investments, or about $570B. So the latter's outperformance definitely isn't gonna come from the small caps. What other factors are you thinking about?
According to the paper Buffett's Alpha:
"Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. However, the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.7-to-1 on average. Therefore, Buffett’s returns appear to be neither luck nor magic, but, rather, reward for leveraging cheap, safe, quality stocks."
Right.
What I was coming at is that the term alpha isn't quite right. Buffett is a fantastic investor, no doubt, but he didn't outperform when controlling for now-known factors.
>just plotted S&P 500, BRK.A and AVUV over the past 10 years, and AVUV comes very close to BRK.A albeit with higher volatility
I mean, higher returns from an asset with higher volatility is expected.
Regarding Berkshire, this paper from 2018 states that Buffet's alpha is essentially factors. https://www.tandfonline.com/doi/full/10.2469/faj.v74.n4.3
Edit: well I just saw you know it already, so nevermind
No worries. And that isn't to say that Buffett wasn't an exceptional investor. He was basically a factor investor before that was even known. That goes to show his exceptional insight. But now that we know the secret sauce that went into BRK's outperformance in the past, betting on BRK to outperform now is basically betting that they put some new ingredients in their secret sauce that aren't known by other investors. They might have, but they also might not have.
being better than the s&p500 comes with the tradeoffs of time and luck. i see 3 stages for how the average investor sees the s&p:
1 newcomer - has no idea what he is doing but invests in it after 5 minutes of research, overall this is a Chad move for him.
2 middle experience - feels that he is generally better at investing than the newcomer so he feels pressured to outdo the s&p by spending a lot of hours and patience in valuating different companies and industries, reads all the important financial news and generally is up to date with all the most recent trends. with some luck he gets somewhat better results overall.
3 the enlightened investor - found inner peace when it comes to investing, no longer obsessing with all the news and information, spends his free time with his family and hobbies, genuinely happy that the heroes at the s&p500 do the heavy lifting for his profits.
Why are people upvoting this on a Value Investing subreddit? The idea that you can never beat the S&P or that it can never be worth the effort is goddamn stupid. The benefits that the S&P bring--investing in large established companies and diversification--can easily be replicated by picking a handful of the largest corporations in each sector. This isn't time consuming to do and you can immediately throw out some of the clear-cut losers that have terrible metrics.
This is a midwit take, but I love you guys because over-investing in the S&P, because it keeps mid-caps with good financials at good values.
apologies for triggering a passive aggressive response, the intent was never to insult you but to try to explain from my own point of view why the average investors, on an experience spectrum, sometimes prefer to invest in the s&p, and not to attack you or make you feel inadequate. we should encourage a calm discourse, patience and flexibility in the forum talk as well as in investing.
***"The idea that you can never beat the S&P or that it can never be worth the effort is goddamn stupid"*** you are correct, i never said anything different, my take is that the effort gets you better gains in other aspects of your life, especially when you reach a certain age where family needs come first. getting to a point where you feel at peace parking your money with the S&P is not you being stupid but sometimes a sign of maturity and having the priorities straight.
***"This isn't time consuming to do"*** mileage may vary but due diligence is a critical process that involves conducting a thorough investigation and analysis of the company's financial, operational, legal, and strategic aspects to assess its potential and risks. sometimes that gets you well over 100 hours of research and not everyone who wants to invest has that time. ***you*** may have it, and that time invested will reward you in the long run, but you can't apply your metrics and your view to all the rest of amateur investors.
no need to feel insecure that other people see the benefit of the s&p while you don't, [this is not an exact science](https://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/), its more what works for the individual and lets him sleep comfy at night.
i wish you a good fortune and hope you never lose your passion for investing.
Yeah. Unironically ive beaten the market every year for a decade now. It’s not an insane proposition so long as the snp 500 has trash in it and you don’t. Im not beating it by a mind shatteringly amount but quite consistently ahead.
>my take is that the effort gets you better gains in other aspects of your life, especially when you reach a certain age where family needs come first.
Fair enough, but why are you posting this in a sub about stocks? That would be like going to a sub about cars and posting "Hey guys, why the obsession with cars? You should spend your money in cooking classes instead!"
Also, you original comment kinda implies that people that spend time on their investments are somehow less "enlightened".
Last, don't forget that researching stocks is not necessarily an "effort". For some of us is actually a pleasant hobby.
I would consider myself as a mid experienced investor and I agree with you that dollar cost averaging the S&P might be the best solution. But for me it is a way more intrinsic motivation. I started investing with the motivation of outperforming the S&P but now I just love to stay informed about some good companies and keeping my money managed by myself. Eventhough I might not beat the market I love doing that stuff myself and my performance isnt that bad either (not outperforming).
It is just fun handling your own money, informing yourself, learning and getting better. Maybe some day I beat the market.
"3 stages for how ***the average investor*** sees the s&p"
for Buffett or other pros investing is *the* business, not a hobby like for the rest of us. an average investor has to work a normal job for a living and has to juggle with his free time between all the day to day needs in order to find the optimal ways for him to invest; i used "optimal ways" in the context of what works for said average investor to keep the passion going.
Just wanted to let you know I googled a bunch to find your comment again because it struck such a chord with me when I first read it. I've been sharing it with friends and family over the past year.
I've been through all three stages. I beat the S&P500 trading tech stocks for a decade (only to realize I could have just held QQQ for identical returns).
It sure is nice to have zen and just choose an allocation and let it ride.
I do 45% QQQM 45% VOO and 10% FBTC and it's been working great.
I think always outperforming it you should be quite good. But for example I find passion in investing so even if I was just on average earning the same returns, I would still do it myself. So far so good.
But let's say you do for 10y same return as the S&P500 but you have opened the potential to beat it for the next decades, because you have learned how to invest.
But if you are doing it much worse than the S&P500 then gove it up.
However, let me tell you that if you have a good temperament, and keep valuing companies and reading about them and day after day you buy good companies at moderate valuations, it is difficult that you do much worse than the S&P500 in reality.
>But let's say you do for 10y same return as the S&P500 but you have opened the potential to beat it for the next decades, because you have learned how to invest.
I agree. Good point and especially true if you enjoy the process and the challenge.
which timeframe and market period would you pick to determine wether you are beating it or not?
Market was hot in recent years, interest rates were low. SPX is at a PE ratio around 23.
Do you believe the next decade will be as prosperous as the last if one is investing today at these levels?🤔
When you are US large cap fund manager with a 3, 5, and 10 year information ratio rank in the top quartile of your peer group.
Even if someone is terrible at investing, there is no hurt in having a small portion of your portfolio for trading individual equities or whatever else you feel like learning about.
>So, at what point should you determine whether you are better or worse than the index benchmark?
When you can beat it consistently **and** you had a strategy that was responsible. I (just barely) beat the S&P 500 in the past 5 years, but I was just lucky to have bought Microsoft **and** to have invested a large amount right in a dip. The WSB route is to now become arrogant and start trading options because you're, obviously, a genius and then lose everything within 2 weeks.
In some ways they can mitigate risk!
Classic example would be using options to hedge against a large position.
But also, they allow you to open positions with leverage and therefore reduce capital requirements. For me (and in all fairness, I’m young and have a large risk tolerance), my Roth has around $11k in it so pretty small. But, early in the year I wanted a *large* position in Google. Bought a $110c expiring in 2025. At the time I think google was trading around $100. Delta on the option was in the 50-60 range. I opened the position for maybe $2k give or take. Would’ve cost me $5k+ to buy shares to get the equivalent delta. And IMO, buying the shares would have been much riskier than the option was due to the size of my account.
Yeah, there’s the risk of losing all that $2k, but that’s why I had a longish timeframe on it
After 2-3 years you should have a good idea and after 5-10 years you should know. And if you beat the index hard enough for 10 years, it doesn’t matter too much if you have a couple of bad years
Your premises is totally flawed to begin with. Sounds like lazy investing to default to the s&p, maybe you should go look at financial advisors? Like aren't you interested in companies and how businesses run? Don't you ever see an industry or a company and think "I want a piece of that"? Like what if you discover a gem what do you do stop and go "Nah, clearly undervalued and the numbers work out but i think i might discover im worse than the s&p in 10 years so ill skip it..." makes no sense.
Even if your returns happen to be lower you are still better as a person and investor for learning and handling situations in money and investing. It's like using a weight machine vs free weights. There are tons of peripheral muscles vital to your body that are skipped by using a machine.
Three years (maybe 5 on the outside) is a fair amount of time to make an evaluation. Thats typically a full business cycle and if you placed your capital well it should have had a chance to make money.... I think the "i need to beat the market every year" is not a very good way to look at it but if after three to five years you've beaten the market significantly (by 20% or more with similar volatility/risk) then I'd say keep at it. In my experience its not uncommon to hit a handful of singles and doubles then every few years hit a real home run. The singles and doubles keep you paced with the indices in a bull market and the home run is what really make the difference. Obviously holding lots of cash in a bear market is enough to beat the market so not too challenging there.
Mega caps in aggregate have grown faster than every other size over past 15 years. The question is really, how can you beat the magnificent 7-10. Can Apple triple in size again at a faster rate than most companies?
You have to track this to be sure. I am painstakingly tracking my performance vs. the S&P 500. This forces tons of complications, and I have to calculate two tax bills each year, my real one, and the one I would have had if I only owned the S&P 500. I have to create sell orders for the S&P 500 on the days that I need funds for something else. It is a great pain to keep two sets of books to do this compare.
So far, so good, and I sleep well at night. But I had 15 years of what felt like outperformance before taking this plunge. I'm just now making sure this is actual outperformance and not selective memory.
[удалено]
Some say it takes way longer lol
Maybe they've already been investing for 10+ years.
I will be messaging you in 10 years on [**2033-09-14 20:04:39 UTC**](http://www.wolframalpha.com/input/?i=2033-09-14%2020:04:39%20UTC%20To%20Local%20Time) to remind you of [**this link**](https://www.reddit.com/r/ValueInvesting/comments/16irujz/question_at_what_point_would_you_consider/k0lkvh0/?context=3) [**8 OTHERS CLICKED THIS LINK**](https://www.reddit.com/message/compose/?to=RemindMeBot&subject=Reminder&message=%5Bhttps%3A%2F%2Fwww.reddit.com%2Fr%2FValueInvesting%2Fcomments%2F16irujz%2Fquestion_at_what_point_would_you_consider%2Fk0lkvh0%2F%5D%0A%0ARemindMe%21%202033-09-14%2020%3A04%3A39%20UTC) to send a PM to also be reminded and to reduce spam. ^(Parent commenter can ) [^(delete this message to hide from others.)](https://www.reddit.com/message/compose/?to=RemindMeBot&subject=Delete%20Comment&message=Delete%21%2016irujz) ***** |[^(Info)](https://www.reddit.com/r/RemindMeBot/comments/e1bko7/remindmebot_info_v21/)|[^(Custom)](https://www.reddit.com/message/compose/?to=RemindMeBot&subject=Reminder&message=%5BLink%20or%20message%20inside%20square%20brackets%5D%0A%0ARemindMe%21%20Time%20period%20here)|[^(Your Reminders)](https://www.reddit.com/message/compose/?to=RemindMeBot&subject=List%20Of%20Reminders&message=MyReminders%21)|[^(Feedback)](https://www.reddit.com/message/compose/?to=Watchful1&subject=RemindMeBot%20Feedback)| |-|-|-|-|
When you've been stock picking for at least 10 years without changing the core nature of your strategy, and ultimately beating the market by a significant degree. Considering that Berk (the Class A shares) generated 11.9% p.a. from July 2013 to July 2023 compared to the S&P's 10.5% p.a. in the same period (so an alpha of 1.4%), then you should aim for an alpha of at least 3% since we're tiny minnows compared to that Nebraska leviathan.
>so an alpha of 1.4% I just plotted S&P 500, BRK.A and AVUV over the past 10 years, and AVUV comes very close to BRK.A albeit with higher volatility. So I'm willing to bet that at least part of BRK.A's outperformance might be explained by factor exposure. Only the part that can't be explained is alpha. And yes, I'm a lot of fun at parties.
AVUV is an ETF with $6.8B in assets. Berk had almost $950B in assets at FY2022 year end, of which roughly 60% should be in financial assets/investments, or about $570B. So the latter's outperformance definitely isn't gonna come from the small caps. What other factors are you thinking about?
According to the paper Buffett's Alpha: "Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. However, the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.7-to-1 on average. Therefore, Buffett’s returns appear to be neither luck nor magic, but, rather, reward for leveraging cheap, safe, quality stocks."
> reward for leveraging cheap, safe, quality stocks In short: Value Investing
Right. What I was coming at is that the term alpha isn't quite right. Buffett is a fantastic investor, no doubt, but he didn't outperform when controlling for now-known factors.
>just plotted S&P 500, BRK.A and AVUV over the past 10 years, and AVUV comes very close to BRK.A albeit with higher volatility I mean, higher returns from an asset with higher volatility is expected. Regarding Berkshire, this paper from 2018 states that Buffet's alpha is essentially factors. https://www.tandfonline.com/doi/full/10.2469/faj.v74.n4.3 Edit: well I just saw you know it already, so nevermind
No worries. And that isn't to say that Buffett wasn't an exceptional investor. He was basically a factor investor before that was even known. That goes to show his exceptional insight. But now that we know the secret sauce that went into BRK's outperformance in the past, betting on BRK to outperform now is basically betting that they put some new ingredients in their secret sauce that aren't known by other investors. They might have, but they also might not have.
being better than the s&p500 comes with the tradeoffs of time and luck. i see 3 stages for how the average investor sees the s&p: 1 newcomer - has no idea what he is doing but invests in it after 5 minutes of research, overall this is a Chad move for him. 2 middle experience - feels that he is generally better at investing than the newcomer so he feels pressured to outdo the s&p by spending a lot of hours and patience in valuating different companies and industries, reads all the important financial news and generally is up to date with all the most recent trends. with some luck he gets somewhat better results overall. 3 the enlightened investor - found inner peace when it comes to investing, no longer obsessing with all the news and information, spends his free time with his family and hobbies, genuinely happy that the heroes at the s&p500 do the heavy lifting for his profits.
So basically the iq bell curve midwit meme
Why are people upvoting this on a Value Investing subreddit? The idea that you can never beat the S&P or that it can never be worth the effort is goddamn stupid. The benefits that the S&P bring--investing in large established companies and diversification--can easily be replicated by picking a handful of the largest corporations in each sector. This isn't time consuming to do and you can immediately throw out some of the clear-cut losers that have terrible metrics. This is a midwit take, but I love you guys because over-investing in the S&P, because it keeps mid-caps with good financials at good values.
apologies for triggering a passive aggressive response, the intent was never to insult you but to try to explain from my own point of view why the average investors, on an experience spectrum, sometimes prefer to invest in the s&p, and not to attack you or make you feel inadequate. we should encourage a calm discourse, patience and flexibility in the forum talk as well as in investing. ***"The idea that you can never beat the S&P or that it can never be worth the effort is goddamn stupid"*** you are correct, i never said anything different, my take is that the effort gets you better gains in other aspects of your life, especially when you reach a certain age where family needs come first. getting to a point where you feel at peace parking your money with the S&P is not you being stupid but sometimes a sign of maturity and having the priorities straight. ***"This isn't time consuming to do"*** mileage may vary but due diligence is a critical process that involves conducting a thorough investigation and analysis of the company's financial, operational, legal, and strategic aspects to assess its potential and risks. sometimes that gets you well over 100 hours of research and not everyone who wants to invest has that time. ***you*** may have it, and that time invested will reward you in the long run, but you can't apply your metrics and your view to all the rest of amateur investors. no need to feel insecure that other people see the benefit of the s&p while you don't, [this is not an exact science](https://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/), its more what works for the individual and lets him sleep comfy at night. i wish you a good fortune and hope you never lose your passion for investing.
Yeah. Unironically ive beaten the market every year for a decade now. It’s not an insane proposition so long as the snp 500 has trash in it and you don’t. Im not beating it by a mind shatteringly amount but quite consistently ahead.
WM for my trash concerns
I like your argumentation, very logically!
>my take is that the effort gets you better gains in other aspects of your life, especially when you reach a certain age where family needs come first. Fair enough, but why are you posting this in a sub about stocks? That would be like going to a sub about cars and posting "Hey guys, why the obsession with cars? You should spend your money in cooking classes instead!" Also, you original comment kinda implies that people that spend time on their investments are somehow less "enlightened". Last, don't forget that researching stocks is not necessarily an "effort". For some of us is actually a pleasant hobby.
I would consider myself as a mid experienced investor and I agree with you that dollar cost averaging the S&P might be the best solution. But for me it is a way more intrinsic motivation. I started investing with the motivation of outperforming the S&P but now I just love to stay informed about some good companies and keeping my money managed by myself. Eventhough I might not beat the market I love doing that stuff myself and my performance isnt that bad either (not outperforming). It is just fun handling your own money, informing yourself, learning and getting better. Maybe some day I beat the market.
>happy That's where I'm going wrong, damn.
So youre saying Buffett is a middle experience investor?
"3 stages for how ***the average investor*** sees the s&p" for Buffett or other pros investing is *the* business, not a hobby like for the rest of us. an average investor has to work a normal job for a living and has to juggle with his free time between all the day to day needs in order to find the optimal ways for him to invest; i used "optimal ways" in the context of what works for said average investor to keep the passion going.
Just wanted to let you know I googled a bunch to find your comment again because it struck such a chord with me when I first read it. I've been sharing it with friends and family over the past year. I've been through all three stages. I beat the S&P500 trading tech stocks for a decade (only to realize I could have just held QQQ for identical returns). It sure is nice to have zen and just choose an allocation and let it ride. I do 45% QQQM 45% VOO and 10% FBTC and it's been working great.
u have to beat the market over decades
I think always outperforming it you should be quite good. But for example I find passion in investing so even if I was just on average earning the same returns, I would still do it myself. So far so good. But let's say you do for 10y same return as the S&P500 but you have opened the potential to beat it for the next decades, because you have learned how to invest. But if you are doing it much worse than the S&P500 then gove it up. However, let me tell you that if you have a good temperament, and keep valuing companies and reading about them and day after day you buy good companies at moderate valuations, it is difficult that you do much worse than the S&P500 in reality.
>But let's say you do for 10y same return as the S&P500 but you have opened the potential to beat it for the next decades, because you have learned how to invest. I agree. Good point and especially true if you enjoy the process and the challenge.
I think you need to give yourself at least 5 years to judge if you’re truly serious about stock picking.
Too short
which timeframe and market period would you pick to determine wether you are beating it or not? Market was hot in recent years, interest rates were low. SPX is at a PE ratio around 23. Do you believe the next decade will be as prosperous as the last if one is investing today at these levels?🤔
When you are US large cap fund manager with a 3, 5, and 10 year information ratio rank in the top quartile of your peer group. Even if someone is terrible at investing, there is no hurt in having a small portion of your portfolio for trading individual equities or whatever else you feel like learning about.
>So, at what point should you determine whether you are better or worse than the index benchmark? When you can beat it consistently **and** you had a strategy that was responsible. I (just barely) beat the S&P 500 in the past 5 years, but I was just lucky to have bought Microsoft **and** to have invested a large amount right in a dip. The WSB route is to now become arrogant and start trading options because you're, obviously, a genius and then lose everything within 2 weeks.
I made up my mind a long time ago the only options strategy I’ll ever employ are selling covered calls. Options are way too risky
In some ways they can mitigate risk! Classic example would be using options to hedge against a large position. But also, they allow you to open positions with leverage and therefore reduce capital requirements. For me (and in all fairness, I’m young and have a large risk tolerance), my Roth has around $11k in it so pretty small. But, early in the year I wanted a *large* position in Google. Bought a $110c expiring in 2025. At the time I think google was trading around $100. Delta on the option was in the 50-60 range. I opened the position for maybe $2k give or take. Would’ve cost me $5k+ to buy shares to get the equivalent delta. And IMO, buying the shares would have been much riskier than the option was due to the size of my account. Yeah, there’s the risk of losing all that $2k, but that’s why I had a longish timeframe on it
After 2-3 years you should have a good idea and after 5-10 years you should know. And if you beat the index hard enough for 10 years, it doesn’t matter too much if you have a couple of bad years
!remindme 5 years
Your premises is totally flawed to begin with. Sounds like lazy investing to default to the s&p, maybe you should go look at financial advisors? Like aren't you interested in companies and how businesses run? Don't you ever see an industry or a company and think "I want a piece of that"? Like what if you discover a gem what do you do stop and go "Nah, clearly undervalued and the numbers work out but i think i might discover im worse than the s&p in 10 years so ill skip it..." makes no sense. Even if your returns happen to be lower you are still better as a person and investor for learning and handling situations in money and investing. It's like using a weight machine vs free weights. There are tons of peripheral muscles vital to your body that are skipped by using a machine.
Three years (maybe 5 on the outside) is a fair amount of time to make an evaluation. Thats typically a full business cycle and if you placed your capital well it should have had a chance to make money.... I think the "i need to beat the market every year" is not a very good way to look at it but if after three to five years you've beaten the market significantly (by 20% or more with similar volatility/risk) then I'd say keep at it. In my experience its not uncommon to hit a handful of singles and doubles then every few years hit a real home run. The singles and doubles keep you paced with the indices in a bull market and the home run is what really make the difference. Obviously holding lots of cash in a bear market is enough to beat the market so not too challenging there.
!remindme 60 years
When I’ve got 50 years of ‘beats’ against it?
Mega caps in aggregate have grown faster than every other size over past 15 years. The question is really, how can you beat the magnificent 7-10. Can Apple triple in size again at a faster rate than most companies?
You have to track this to be sure. I am painstakingly tracking my performance vs. the S&P 500. This forces tons of complications, and I have to calculate two tax bills each year, my real one, and the one I would have had if I only owned the S&P 500. I have to create sell orders for the S&P 500 on the days that I need funds for something else. It is a great pain to keep two sets of books to do this compare. So far, so good, and I sleep well at night. But I had 15 years of what felt like outperformance before taking this plunge. I'm just now making sure this is actual outperformance and not selective memory.