Diary: Buffett, Greenblatt

Indecent Haste

Fascinating post on 09-Feb-2010 at Eurosharelab about Buffett's returns. I was vaguely aware of its existence before, and I was keen to get hold of the statistics, but could never seem to find them. Anyway, here they are:

Year             Value of $10,000 invested in             Value of $10,000 invested in   

                     Berkshire Hathaway stock                 the S&P 500 index

1971                       $10,000                                                 $10,000
1974                       $5,708                                                   $7,456
1975                       $5,422                                                   $10,229
1976                       $13,392                                                 $12,643
1991                       $1,361,805                                            $92,940
2008 (17 Nov)          $14,387,737                                          $259,068

Profit and Value Strategy

Sketch notes of article on 21-Jun-2011.

PAV (Profit and Value) Stategry differs from MFI (Magic Formula Investing) in its method of determining value and quality. PAV ises book-to-market for value, and GPM (gross profitability) for quality.

GPM = (revenues - costs of goods sold)/ total assets

PAV turns out to be a slight winner of MFI. Gross profits to assets is explored:

I think it’s interesting that gross profits-to-assets is as predictive as book-to-market. I can’t recall any other fundamental performance measure that is predictive at all, let alone as predictive as book-to-market (EBIT / (NPPE +net working capital) is not. Neither are gross margins, ROE, ROA, or five-year earnings gains).

GPM and PBV produce volatile results. Greenblatt:

it is partially the leverage embedded in low book-to-market that contributes to the outperformance over the long term.

(Side note:  this is very interesting! It could mean that a lot of the outperformance by Greenblatt is simply due to taking on more risk. This could be one of those "it works until it doesn't" strategies).

O'Shanaughnessy is cautious on low PBV:

it’s virtually impossible to buy the stocks that account for the performance advantage of small capitalization strategies.

 A market capitalization of $2 million – the cheapest and best-performed decile – is uninvestable. This leads O’Shaughnessy to make the point that “micro-cap stock returns are an illusion”

Blogger concludes:

I’ve now abandoned book-to-market

Excellent post by Greenbackd.