Intelligent Investor Club

The gain in networth for Berkshire in 1997 was $8.0 billion, a good 34.1%. According to Warren, this return was no big deal. When the market goes on a bull run, any investor can get large returns.

It is important to recognise this and not become over-confident of one’s investment abilities during a bull run.

In fact, the S & P index rose almost as fast as Berkshire. Berkshire tends to underperform the S & P during a market boom. The reason is that Berkshire always has to pay tax, something that neither an index nor a mutual fund needs to pay.

The table below shows Berkshire’s investments holdings and earnings from their operating business:

                                           Pre-tax Earnings Per Share
                      Investments          Excluding All Income from
       Year             Per Share                   Investments        

       1967             $    41                      $  1.09
       1977                 372                        12.44
       1987               3,910                       108.14
       1997              38,043                       717.82

Here’s how the numbers look like on a percentage basis:

                                           Pre-tax Earnings Per Share
                          Investments          Excluding All Income from
  Decade Ending            Per Share                  Investments        

      1977                   24.6%                       27.6%
      1987                   26.5%                       24.1%
      1997                   25.5%                       20.8%
 Annual Growth
  Rate, 1967-1997            25.6%                       24.2%

From the numbers, it will become apparent that the operating business is not something insignificant to Berkshire. However, the returns are certain to fall in the future. Size is a problem. An idea giving Warren Buffett a $10,000 gain would double his portfolio in 1951 when he was still a student under Benjamin Graham. Now, a $500 million pre-tax gain for Berkshire would only add one percentage point to the returns.

To confirm this point, Warren Buffett’s annual results in 1950s were better by nearly thirty percentage points than any gains in subsequent decades.

In the current bull market, it is hard to find prospects for committing funds. Investing should be done like what a master batsman does. You hold until you get a good ball in your strike zone that has a high chance of a strike.

In the case of the batsman, he can hold out for a maximum of three times before he is forced to bat. For an investor, he can never be called out even if he doesn’t bat at all. While standing in the bat zone day in and day out with a bat over the shoulder and waiting for a good ball is not fun, sometimes it has to be done.