A lot of claims about Warren Buffett and value investing being made here are true to a degree, but a bit misleading. Some notes:
-Buffett and Munger did not perform activism or have the ability to influence boards at all companies they invested in. There’s no doubt they did this at some – look at Berkshire as the obvious blatant example – but there have been innumerable situations where they took purely passive stakes. To the extent that their excess returns ONLY came from activism, then this would indeed imply that active value investing is pointless. However, this is just not true – Buffett was putting up incredibly strong results far before he had enough capital to move the needle in getting board seats or otherwise influencing business management/capital allocation.
Which ties into what I said above: if you are not taking controlling stakes, you need to invest in a business whose management are focused on creating shareholder value. You can see this in Berkshire’s recent investment in AAPL. He didn’t invest in AAPL until the business was mature/predictable, and a new CEO who was focused on shareholder value was at the helm.
I don’t know the exact breakout here, but I’ve read both Buffett biographies, all his partnership letters, and all of Berkshire letters, and it is highly misleading to imply that activism accounts for a significant amount of his alpha throughout his whole career. There were definitely phases where it did, though.
-While it is true that without action it is harder to unlock value, it is not true that it will remain unlocked indefinitely. There are several paths to value for non-controlling investors.
One common one is that a larger fish than you will see the value and create some sort of action (making a large position, an announcement, etc.) that will drive the price up. So it doesn’t have to be you, because others will see it, too.
But even without that, stock prices just oscillate a lot, generally around value, if in (to a value investor’s framework) random patterns. Most value investors say that within 2-5 years generally price intersects with value. This matches my experience. One thing I would clarify here is you have to be realistic about what’s happening at the business – if you own a business in long-term decline with exorbitant management comp, even a stock trading at 50% its NCAV can be a loser. It needs to be real, legitimate value.
-A point about annual reports being as long as a menu is a bit of an exaggeration, but the broader point that things are more complicated is certainly true. The world and its industries move faster, there is far more disclosure, and there are far more eyeballs/stocks out there hunting for cheap stocks. It’s certainly harder than it was in the 1950s, but there are also pockets of the market that are less efficient (@white belt hits on this above, but it’s a lot broader than just looking OTC). I’m not 100% on this figure, but I believe there are over 100,000 publicly traded stocks in the world (when factoring in things like OTC stocks in the US and similar elsewhere).
For those who have spent time looking at such things, it’s laughable to think that all of these are efficiently priced. There’s a lot of reasons for such inefficiency, one of which is there is little economic incentive for big money to be looking at companies with market caps of sub-$50M. And these companies are often much easier to understand, and their stock prices can be wild.
-I’m not sure what the point is about the dollar-weighted return analysis of Buffett – of course most of anyone’s returns, in a lifetime of positive returns, will come later in life. If the point was that he had some sweetheart deals later in life, sure, that’s true to a degree. But it’s not all-compassing. Again with AAPL, Berkshire has made an absolute fortune in AAPL (to date) without a controlling or influencing position. This shows the ability to generate excess returns without influence, but the dollar amounts involved in AAPL, a mammoth amount of Berkshire’s value relative to its lifetime results, are just a function of how compounding works.
-Comparing someone who has the length of record with Jim Simons to Buffett is silly – you can’t sustain high returns as your capital base grows (and you have fewer and fewer investment options, and effectively get closer and closer to being the market). In their dominant fund(s?), Simons/Renaissance returns most of their profits to investors every year for this very reason, and if they didn’t their record would be nowhere close to what it is. Not to take away – it’s incredibly amazing!
-There is a sentiment expressed in this thread that it’s impossible/worthless to try to beat the market via value investing, but in my personal experience (admittedly just 7 years) and in those of my more experienced friends/mentors/teachers, there are most certainly people who practice value investing and beat the market by at least the 2-3% annual outperformance @alex mentioned. As @alex said, this amounts to massive outperformance over time. As a simple example, the difference between a 5% and an 8% return over 50 years is 4x. Or perhaps more to home for early retirees, an extra 3% per year could be the difference between having to save up 14 years of expenses, or 25 (granted this is a little simplistic). And I'm just talking about 3% outperformance.
Despite all of the above, I do not want to give off the wrong impression at all. Value investing is hard work, it takes a lot of time, many people will find it very boring, it can be emotionally frustrating, outperformance is often lumpy meaning there are individual years and series of years you underperform, and most humorously you have people tell you it’s impossible over and over
. Despite all of this, there are people doing it successfully.
To the OP, I think it’s really, really hard to know how the “average/normal” value investor does, because there is extremely little data on how folks who practice value investing specifically do. I would love to know the answer to this, too.
My guess is that people learn within a few years whether or not they have the cognitive/emotional wiring and time/interest for it, and if they don’t they move on and do other techniques like indexing, because they are cognitive that there is an opportunity cost to what they are doing, and why do all that work for equal or worse returns? Those who succeed probably keep going until they lose interest/where it’s no longer worthwhile.