The Fallacy of Short-Term Investment Focus

05/05/2017 09:26 am ET

Tomorrow the annual pilgrimage of value investors to Omaha, Nebraska will culminate as Chairman Warren Buffett and Vice Chairman Charlie Munger hold court at the Berkshire Hathaway Annual Meeting. It is a shareholder meeting like no other, as roughly 40,000 people will fill an arena built for basketball and rock concerts. An overflow crowd will watch the festivities in remote locations around Omaha. And, Yahoo will livestream the event to hundreds of thousands more around the globe.

Some pundits contend that the adulation is unwarranted and that Mr. Buffett and his band of merry men have lost their collective touch. A recent article by Mark Hake on Seeking Alpha details the 2016 performance of the stocks held by Berkshire Hathaway (BRKA) 2016 versus the S&P 500. Mr. Hake showed that that BRKA's stock portfolio "only marginally, if at all beat the S&P 500 on a total return basis." He concluded his analysis by stating that "Mr. Buffett might want to make some changes based on this performance."

While the conclusion of the article is dead wrong, it is a great example of what is perhaps the biggest problem with investing today -- focus on the short-term. Successful investing is not about a series of sprints, but is a marathon. It is about investing and not trading.

As a long time Berkshire shareholder, I am thrilled that Mr. Buffett doesn't react to the short-term. Mr. Hake's conclusion reminds me of another time when in 1999, a leading financial publication - Barron's - ran a cover story titled "What's Wrong Warren?" The first line of the article read "After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch." The article made the point that "Buffett hasn't anticipated or capitalized on the boom in technology stocks in the past few years." We all know what happened to tech stocks when the bubble burst the very next year.

Buffett doesn't beat the market every year, nor should we expect him or anyone else to do so. You see, what Hake didn't focus on was the long term. From 1965 through 2016, Berkshire had a compound annual return of 20.8% versus 9.7% for the S&P 500. If it was a fight, the referee would have stepped in and stopped it.

What really frightens me from the standpoint of the investing public is the definition of the long-term seems to be getting shorter and shorter. I recently saw a piece on CNBC in which two pundits debated the merits of a stock. The host suggested that the two men should return in six months to determine who was right. I guess to some, six months is the long term.

By the way, the change Mr. Hake suggested was that Buffett or his successor may want to index a portion of that stock portfolio. Now, suggesting Buffett index is akin to pinch hitting for Babe Ruth.

As a long-time Berkshire shareholder, I am happy Warren Buffett is the Meb Keflezighi of investing and not the Usain Bolt.

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