And that's the problem.
There are many tremendous investment opportunities out there. More often than not, those opportunities aren't found in what the crowd currently is chasing after. No, they're discovered in today's undervalued opportunities. In the chart above, the commodity is diamonds and the undervalued opportunity was the Tiffany Company and what it potentially could do with diamonds by bringing them to market.
Wise "value" investors--like Warren Buffett--look for those undervalued opportunities and seize upon them. To wit:
- A $10k investment in Berkshire Hathaway (BH) stock in 1965 would have grown by 2005 to be worth ~$30M.
- That's ~60x's greater than if same investment was made in the Standard & Poor’s 500 Index.
Like the "value-approach" return?
According to Morningstar, investors in BH have made a compound return of only 5.3%/year since 1978. That's not so good.
Consider the same investment made by diversifying into low-cost value indexes and passively managed mutual funds. Evaluating the 15 years ending June 30, 2013, market analyst Paul Merriman found that purchasing 5 Dimension Fund Advisors' value funds would have returned 9.3%/year. During the same time, that’s a ~175.5% greater return compared to BH, with less risk.
It seems that wise investing begins with a long-term strategy, builds a base (perhaps 50%) that's diversified and spread among sound investment vehicles that lessen potential risk. For some growth, wise investing requires a sober analysis of potential opportunity (perhaps 40%). Lastly, to seize upon special opportunities, wise investing requires a bit of insight into trends and luck (about 10%). That's called "semi-aggressive" growth investing.
That's too much to expect of non-professionals. That's what mutual funds and ETFs provide: Well-researched investment vehicles. Using Morningstar, it's easy for a non-professional to find out how each of those vehicles are currently performing. (Remember: Current performance does not provide an indicator of future performance.) Crucial is the investment team, its longevity, and the annual expense rate.
Chasing after what professional investors have already chased after doesn't appear to be a sound way to invest. It's more like playing the lotto...after the winning numbers have already been announced.
Let the discussion begin...
To read Paul Merriman's analysis of BH's performance, click on the following link: