If Warren Buffett started today

craft · 27 August 2011

davede said:
On the subject of different investment periods. It is worth noting that that 69 to 82 was one of the longest secular bear markets in history. Holding the index would have netted you (post inflation) almost nothing.

Does this statement take into account reinvestment of dividends?

The longer the investment horizon, the more important is the dividend income.

For the period 1900 to 2009 the historical inflation adjusted returns (Real) for US equities is 6%. Capital gains accounts for 1.7%.of that.

Capitalising $1 at 1.7% for 109 years = $6
Capitalising $1 at 6% for 109 years = $573

I’m not sure what the dividend yields were through 1969-1982 but I suspect Buffett was a pig in mud compounding cash flow yields.

Despite the doom and gloom, I see the same opportunities now.

Tysonboss1 · 27 August 2011

craft said:
I’m not sure what the dividend yields were through 1969-1982 but I suspect Buffett was a pig in mud compounding cash flow yields.

he sure was,

In 50 years Berkshire has not paid a dividend, every single cent of interest, dividend and profit it generate on it's investments was reallocated back into buying more investments.

Hence why berkshires shares have gone from $9 to well over $100,000.00 for each share.

He promised shareholders that as long as he was outperforming the market by a certain % over a rolling 5 year period he would retain all cashflow and keep compounding.

If he failed to outperform the index he would start paying dividends and allocating capital back to shareholders.

McLovin · 27 August 2011

craft said:
Does this statement take into account reinvestment of dividends?

The longer the investment horizon, the more important is the dividend income.

For the period 1900 to 2009 the historical inflation adjusted returns (Real) for US equities is 6%. Capital gains accounts for 1.7%.of that.

Capitalising $1 at 1.7% for 109 years = $6
Capitalising $1 at 6% for 109 years = $573

I’m not sure what the dividend yields were through 1969-1982 but I suspect Buffett was a pig in mud compounding cash flow yields.

Despite the doom and gloom, I see the same opportunities now.

I read a research note a few weeks ago that said the ASX on an inflation adjusted basis is at the same level it was in the late 60s. Of course that excludes dividends and indeed the All Ords Accumulation index has a base of 1000 from 1980 and is up in the 30k region now.

Tysonboss1 · 27 August 2011

Some people ask,

" If buffet was truly such a good allocator of capital and it wasn't just luck he made it where he did, why isn't he still earning +25% returns?"

The truth is it is because of his such large capital base, It is impossible for him to spend the time finding all those little niche capital allocations where you can place sums of less than a million and earn high yields,

The companies that Berkshires owns outright and their stock investments produce cashflow of $100,000,000.00 thats $100Million a week.

Could you imagine how hard it would be to allocate that amount of capital each week and still beat the index.

He is doing a great job of beating the index, especially when you consider he has $35Billion in bonds earning small interest.

I don't know many people who could manage that amount of capital aswell as he does, with almost no help or support.

McLovin · 27 August 2011

MrMomentum said:
I’ve often wondered if Buffet started today if he would mainly look for low price stocks (e.g under say $5).

I know that he looks for companies that are undervalued (amongst many other things), but if he were starting in today’s market I wonder if lower price stocks with price leverage would be where he would focus his attention.

Why would nominal price have any bearing on investment decision?

Tysonboss1 · 27 August 2011

McLovin said:
I read a research note a few weeks ago that said the ASX on an inflation adjusted basis is at the same level it was in the late 60s. Of course that excludes dividends and indeed the All Ords Accumulation index has a base of 1000 from 1980 and is up in the 30k region now.

I would be checking their sources of infomation and calculations before I paid heed to that,

Think about how small Australia's capital markets were back then, All of our industry was much smaller, population smaller. etc.etc

I think there must be a flaw in their calculations some where.

But again it's the compounding of earnings that count,

I mean even something as simple as a house, after 50years you may say it only outpaced inflation by say 1%(population growth driven). but the fact it produced cashflow from the rent less maintaince might mean your one house turned into a portfolio of three houses over that time. So the inflation adjusted capital gain is not a good representation of the return on investment.

McLovin · 27 August 2011

Tysonboss1 said:
I would be checking their sources of infomation and calculations before I paid heed to that,

Think about how small Australia's capital markets were back then, All of our industry was much smaller, population smaller. etc.etc

I think there must be a flaw in their calculations some where.

But again it's the compounding of earnings that count,

I mean even something as simple as a house, after 50years you may say it only outpaced inflation by say 1%(population growth driven). but the fact it produced cashflow from the rent less maintaince might mean your one house turned into a portfolio of three houses over that time. So the inflation adjusted capital gain is not a good representation of the return on investment.

I wouldn't be so sure the numbers are wrong. Remember that until the 1990's inflation was high. According to the RBA between 1967 and 1990 inflation averaged 8.4% (in the 70s it was averaging over 10%), from the period 1990-2010 it has averaged 2.6%.

Tysonboss1 · 27 August 2011

McLovin said:
I wouldn't be so sure the numbers are wrong. Remember that until the 1990's inflation was high. According to the RBA between 1967 and 1990 inflation averaged 8.4% (in the 70s it was averaging over 10%), from the period 1990-2010 it has averaged 2.6%.

Yes, but it doesn't matter what the inflation rate was because the numbers were adjusted for inflation.

What it is saying is that outside of inflation the stockmarket did not grow, but over that time there was massive grow in the general economy so it would be hard to believe the companies listed didn't grow.

That being said I have not looked into it, it may be that the companies did grow, but were over valued at the start of the period or under valued at the end.

Wysiwyg · 27 August 2011

Tysonboss1 said:
The competition was huge, Buffet says Berkshire Hathaway textiles was the Biggest investment mistake he ever made.

Have you thought of creating a company to invest other peoples money in value stocks? He did make his first million through partnerships didn't he and did that involve pooled funds?

Tysonboss1 · 27 August 2011

Wysiwyg said:
Have you thought of creating a company to invest other peoples money in value stocks? He did make his first million through partnerships didn't he and did that involve pooled funds?

Yes, he worked for ben Graham's partnership for a number of years before ben wound it up and retired from money management.

He then started his own small fund investment fund,

No I would not think of starting a fund, my own funds keep me going.

davede · 27 August 2011

craft said:
Does this statement take into account reinvestment of dividends?

The longer the investment horizon, the more important is the dividend income.

For the period 1900 to 2009 the historical inflation adjusted returns (Real) for US equities is 6%. Capital gains accounts for 1.7%.of that.

Capitalising $1 at 1.7% for 109 years = $6
Capitalising $1 at 6% for 109 years = $573

I’m not sure what the dividend yields were through 1969-1982 but I suspect Buffett was a pig in mud compounding cash flow yields.

Despite the doom and gloom, I see the same opportunities now.

Good stuff.

should have been more specific on that one. yep was ignoring dividends there - the value investors best friend

McLovin · 28 August 2011

Tysonboss1 said:
Yes, but it doesn't matter what the inflation rate was because the numbers were adjusted for inflation.

Of course it matters what the inflation number was. If inflation was 1% then the market needed to advance by more than 1% to grow in real terms, if inflation was 10% then the market needed to grow by 10% just to tread water. Inflation kills companies, especially CAPEX heavy mining companies (which is what made up the bulk of the ASX back then). Buffet's 1981 Letter explains the link quite well.

If you accept that over that period the inflation rate was 5.6% (per the RBA), then excluding dividends is going to get a real return very close to zero, wouldn't you say?

I'll try and find the research.

McLovin · 28 August 2011

I couldn't find the research, but I found this. http://www.wrenresearch.com.au/downloads/

The All Ords in 1969 was around 400 (having had a pretty good run up over the past few years). 400 adjusted for inflation would today be 4073.

craft · 28 August 2011

I only have CPI data going back to 1969.

McLovin · 28 August 2011

craft said:
I only have CPI data going back to 1969.

View attachment 44237

Where's the CPI data coming from? I used the RBA which gave 4073. http://www.rba.gov.au/calculator/annualDecimal.html

craft · 28 August 2011

McLovin said:
Where's the CPI data coming from? I used the RBA which gave 4073. http://www.rba.gov.au/calculator/annualDecimal.html

From The RBA. Chart might be a bit small to read, but it shows XAO at around 4000 at its starting point of Sep 69. So I don't think we are in disagreement.

Cheers

McLovin · 28 August 2011

craft said:
From The RBA. Chart might be a bit small to read, but it shows XAO at around 4000 at its starting point of Sep 69. So I don't think we are in disagreement.

Cheers

Sorry, my mistake. Had a largish night on the jars after the rugby, so I'm a touch dusty today.

Inflation really punched a hole in those returns early on. 4000 to near 1000 in the space of a few years: Ouch.

banco · 28 August 2011

Some of his deals these days seem to be about renting out his name/reputation for a very large fee (ie Goldman Sachs and Bank of America).

Tysonboss1 · 28 August 2011

McLovin said:
Of course it matters what the inflation number was. If inflation was 1% then the market needed to advance by more than 1% to grow in real terms, if inflation was 10% then the market needed to grow by 10% just to tread water. Inflation kills companies, especially CAPEX heavy mining companies (which is what made up the bulk of the ASX back then). Buffet's 1981 Letter explains the link quite well.

If you accept that over that period the inflation rate was 5.6% (per the RBA), then excluding dividends is going to get a real return very close to zero, wouldn't you say?

I'll try and find the research.

Yes, I understand the concept.

But what I was saying is, when the figures are already adjusted for inflation, why would it matter what the inflation was over that period.

McLovin · 28 August 2011

Tysonboss1 said:
Yes, I understand the concept.

But what I was saying is, when the figures are already adjusted for inflation, why would it matter what the inflation was over that period.

Because it goes a long way to explaining why the market in real terms is about where it was 44 years ago.

You questioned whether the claim -- that market hasn't moved in real terms by much -- was correct, I was attempting to explain why it was believeable.

If Warren Buffett started today

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