Beating Warren Buffett--Part 2
How the Buffett Analysis Came About from
A Timely Review of Worldwide ETFs'
Performance Results
JUDGING THE RESULTS
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In the chart below, the repetitive rolling returns are added beneath the price curves. They show investment performance in a wholly new light. Consider the top pair as landscape. A photograph. A still shot. It is the picture of a journey, one that you will never take. It has a beginning and an ending, traversing mountains and valleys between departure and destination. The start-stop dates are specific and unalterable.
When you glance at it, you may have the feeling that it is good, that you like it, that you want some of it for yourself.
The lower pair of curves show effectively no beginning nor ending. They pattern rolling repetitions--suggesting a moving picture that promises to go on forever. The contrast between the two pairs, upper and lower, is striking--and highly informative.
The landscape snapshot tells you which fund won the race--at least this portion of it. Remember that all start and end dates are arbitrary, and the prices they enclose are random. We, or anyone, can start and end any study with whatever dates we please. We can thereby shape the results. Usually the dates will have a plausible reason for using them, like calendar quarter, or year end, or the oldest publicly available prices for the stock being studied, and so on. The rolling returns dismiss entirely the notions 'arbitrary' and 'random' because there are no specified terminal start and end dates.
Each point in the top curves is a monthly closing price. There are 287 of them. Each point on the bottom two rolling curves is a non-random fact. Its fact is mathematical. It expresses the equation: the price of any month divided by the price 12 months ago. The paradox is that the result of the division of one random event by another yields a non-random value. What is the great use of all this? See below.
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Berkshire Hathaway, Inc. vs Dow Jones Industrials
Rolling Yearly Returns
Prices Indexed to 100%
24 years • 1987-2010 • Monthly
First, rolling returns provide a common denominator to compare all stocks and funds (or anything else that trades) with each other regardless of start and end dates. They do this by substituting fixed, uniform start and end dates, that is, two time dates one year apart--and measuring them sequentially one week at a time as far back as data are available.
For example, the chart above, in March 1998, the one-year (12-month gain) for Berkshire Hathaway (brown curve) peaked at 85.6%. The DJIA peaked at 33.7%--big gains for each in any single one-year period.. Fifteen months later, February 2000, the performance had reversed. BRKA was -38% while the DJIA was +9%.
The March 1998 landscape (top two curves), showed Berkshire to be a strong stock--OK to own. But from that point on, the stock dropped -43.8%. Not a good time to have bought. A decline that size is disheartening and disabling. The bigger the drop, the greater the price claw-back necessary and time spent to recover to break-even. It took the stock five years and five months to close the price gap to its old high. The landscape does not tell you when the recovery is under way. The rolling 12-month's returns do.* They signal a 50% to 95% gain in price rise in the landscape that lasts a year or more. There were nine of these up rides on the roller coaster during the period shown.
Note the three surprisingly great rolling returns between 80 and 90% from 1987 to 1998, the tag end of the giant bull market from 1982.
*The signal is--when the rolling returns drop below 10 or 0,
buy when they recross those thresholds.
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By averaging each of the bottom curves you obtain a single value for each that tells you its own long-term, meaningful, 'true' return per year. These single values can be compared. Then the contrast is crystal clear,
complete, and easy to judge. It is the best singular basis we have found for comparing stocks, funds, indexes, and portfolios. The averages of the long-term rolling returns for Mr. Buffett and Mr. Market are shown here.
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BUFFETT BEATS THE MARKET - Part 1
JUDGING THE RESULTS - Part 2
COPERNICUS BEATS BUFFETT - Part 3
BUFFETT BEATS BUFFETT - Part 4
Forthcoming
Parts 3 and 4
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• Copernicus Group •
© 2011 The 2000 Corporation
All Rights Reserved
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