1st December 2023
Sticking to investment principles
In a week that saw the passing of Berkshire Hathaway Vice Chairman and Warren Buffett’s right-hand man Charlie Munger, it is worth looking at the investment principles of a man who was jointly responsible for investment performance of 3,787,464% since inception against 24,708% from the S&P500.
Munger was known for his "multi-mental models" approach to investing, which involved drawing on a variety of disciplines, such as psychology, economics, history, and mathematics to make investment decisions. He was also credited by Buffett for making him apply traditional value investing to a wider universe of stocks that wouldn’t normally be considered. In Buffett’s words: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner.”
Berkshire Hathaway performance between 1987-2023 relative to the S&P 500 index.
Source: Artorius, Bloomberg
The above chart shows relative performance, a commonly used measure to compare the returns of an investment to a benchmark index, such as the S&P 500 in this case. For example, at the end of this graph the relative performance is around 500%, this means that Berkshire Hathaway outperformed the S&P 500 by 500% during that period. Or for every $1 invested in the S&P 500 you would have almost $39, whereas holding Berkshire Hathaway over the same period would have left you with just shy of $190.
The chart illustrates a commitment to investment principles by not reacting to short-term market trends. Highlighted in grey are pre-stock market crashes (dot-com bubble, pre–global financial crisis 2008 and pre-Covid-19) where price rises were driven, mainly, by momentum rather than fundamentals. The first two of these periods were followed by large periods of relative outperformance as Berkshire Hathaway’s stocks remained robust in challenging periods. This was less apparent in the Covid period as momentum trading returned after the initial scare of the pandemic had subsided, however most of the underperformance was regained.
So, what can Artorius learn from Charlie Munger and Berkshire Hathaway’s methods? And especially what we can learn in the current environment, with so much uncertainty around economic growth and inflation - as US Gross Domestic Product becomes the latest economic indicator to surprise versus analysts’ expectations. The main takeaway should be to stick to what you know. In our discretionary portfolios this means that we continue to believe that long term returns come from a diversified asset allocation, therefore we rarely make large portfolio changes and won’t trade unnecessarily, only rebalancing portfolios when needed.
Economic and market review
Easing inflation concerns and stronger-than-expected corporate earnings boosted stock markets in November, with world equities up over 4% and 9% in sterling and USD, respectively. This, combined with falling bond yields, driven by expectations of lower interest rates going forward - and therefore a rise in fixed income values, has provided a welcome relief for portfolios following a challenging period over the last few months.
Josh Young Portfolio Manager
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All expressions of opinion reflect the judgment of Artorius at 1st December 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.