Buffetted by the Market

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Heather Cullen

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In The Money

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

Buffetted by the Market.

A gruesome week, but we’ll get to that later. I thought that we would take a look at Warren Buffett, the ‘world’s greatest investor’. Yes, he is wildly wealthy ($150 Billion), but is he actually that good an investor?

Buffetted by the Market

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

Buffett took over the company in 1965 when it had a market cap of $19m (although Buffett’s net worth was only $1m at the time) and were trading at $18 per share. His subsequent wealth is all based on the stock price of BRK. BRK owns over 60 subsidiary businesses (90% of revenue) and holds stocks in public companies (Apple, Coca Cola, , AMEX, BoA)

Buffett's Net Worth

Here is Buffett’s net worth over the 6 decades where we have accurate data:

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

You can see that although he has made over $100b over the last 20 years his rate of growth has slowed dramatically. 

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

Putting it on a log scale shows quite a different story:

Did Buffett Beat The market?

You can see that in the last 30 years the rate of growth has slowed considerably. Did he even beat the S&P 500? Let’s check:

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

You can see that although in earlier decades the results beat the S&P 500 that in the last 2 decades, he has not even met them.

Buffett’s Secret? Longevity

Buffet is now 94. He started investing when he was 11 years old when he bought 3 shares of Cities Service Preferred at $38 each.

He has had 83 years in the market. While he has amassed a huge fortune it is not completely due to his skill as an investor, but due to the time during which he had been building his fortune.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

What if he only invested for 35 years?

Most of us (not all, I know) start getting interested in the stock market after our twenties are over. So, let’s say the average investor has 35 years in the market, starting at 30 and finishing at 65.

If Buffett had started with $1,000 when he was 30 and was now 65 what would his net worth be?

(a) $38,000

(b) $380,000

(c) $3,800,000

Click to Reveal Answer

It would be $38,000. (Yes, Really!)

Note that this includes his second best year ever when he made  84.6%. Since then, his annualized return has been 11%, not much more than the average of the S&P which is 10%. 

Early Investing Success

If you compare the last 35 years with his first 35 years, we see that it is a lot different. If he started with $1,000 in 1964 then by 1995 it would have been worth $30,000,000 – a stunning result in anyone’s book. And a LOT different to the $38,000 he made in the last 35 years.

Yet he is STILL revered as one of the greatest investors of all time.

 

Rate of Return: 20% per year?

Buffett is often quoted as having a 20% RoR since 1965. But that doesn’t tell the whole story. This is based almost entirely on the Berkshire Hathaway (BRK) share price. Here is his RoR per decade since 1964. You can see that the % increase has slowed markedly from the heady early years. In fact, the last two decades have been quite dismal when compared with the S&P gains over that time.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

I started going down the rabbit hole with how his percentage holdings had changed over time, but decided I was being weird and gave that up. But some things that I found interesting are:

Buffett’s Will

Warren Buffett’s advice to his children is to invest in low-cost index funds, particularly ETFs that trach the S&P 500, and avoid trying to beat the market through stock picking or active management. After his death he wants 90% of the money he leaves to his wife to be invested in an S&P 500 index fund.

Buffett’s Bets

Hedge funds have always touted (and still do!) that they can beat the market by stock picking and active management of portfolios. Buffett made a $1m bet in 2008 that they couldn’t. He wagered that the Vanguard 500 Index fund would outperform the hedge funds over the decade 2008 – 2018. He placed the bet with Protégé partners who selected a group of five hedge funds,

Buffett won the bet easily. The S&P 500 gained 125.8% while the hedge funds made on average 36%. Even the best hedge fund was significantly less than the S&P. The bet was for charity, and went to Girls Inc of Omaha.

Buffett’s House

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

Known for being frugal, Buffett still lives in the house he bought in 1958 for $31,500, and drives a 10 year old car.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

Buffett & Coke

Not fine wine – 5 cans of coke every day!! That means if he started drinking coke at age 14 and we arranged the coke cans in a pyramid it would be 11.6m high and have a base of 6.3m. Here it is (don’t you just love AI?)

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

To the markets . . .

A dismal week. Worse than dismal. It was a short week – but it made up for it in drama! A drop of 3.6% from market open on Tuesday to market close on Friday.

I feel quite despondent when I think what the future might be. I suspect that the recent market drop was not simply because of the figures, but because of the proposal to tax unrealized capital gains. That will have huge effect on the stock market, and we will look at that next week.

This election is not like normal elections, this has so many ‘firsts’ that I question whether looking back at previous elections has any value. However, we react not predict, so let’s get to it.

SPY Charts

SPY opened at $560.47 on Tuesday morning – right on the lower level of its consolidation range (blue line). After staying just on it for two uneventful days it then had a major drop on Friday, right down to the bottom of the larger trading channel we drew in some weeks ago. (green line). Will this hold? If it doesn’t then the next support is at $520, which is almost where our 200 SMA is.

Some of you will have noticed that a double top has formed, and this is usually a bearish sign – but not always. It is quite normal to bump against resistance a couple of times before breaking through. Which one will it be this time? I don’t know, but if we are following the ITM rules we wait until a death cross before we get out. As the 10 SMA is around $555 this is unlikely to happen this week.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

Remember we got into the trade when SPY was trading around $430 so SPY would have to drop suddenly and massively before this position would be a losing trade. On the weekly chart we can see that SPY is sitting right on the uptrend. Let’s hope it holds.

QQQ Charts

The QQQ Chart is a lot more dismal that the SPY Chart. On Friday it dropped right through support at $460 (green line) and is now trading at $448.69. The support line (pink) at $445 is at the highs of March – April when it was in a tight trading range before dropping then climbing to new highs May – July. Will it hold? I don’t know, we will just have to hope.

Since we are talking chart patterns this could be viewed as a head-and-shoulders pattern, again generally considered to be a bearish sign. But all patterns are in the eye of the beholder, and they work best in hindsight!

On the weekly chart we see that it has dropped right out of the trading range that started last November and is resting on the highs of March, just like the daily chart.

SPYG Charts

I have decided that it is more logical to look at the SPYG chart after the QQQ chart as it is more heavily influenced by QQQ than SPY. WE see the same dismal pattern we saw in QQQ  – a terrible week and now resting on the support / resistance line (green) at the March / April highs. If it drops through this then the next support is at $74. The 10 and 200 SMAs are only $9 apart, but it is unlikely that a death cross will happen this week. Let’s hope it bounces off support.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

The weekly chart (still with my makeshift trend line I notice – must fix that!) shows SPYG sitting exactly on the uptrend line – let’s hope that it holds.

VIX (Volatility) Charts

Unsurprisingly, the VIX has jumped up, and is now over 20 – so we are out of the period of low volatility.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

NVIDIA Subpoenas

Well, NVIDIA has been battered, and our strangle would have ended up in profit because it has dropped 18%. It was not all because of earnings: on 29th August. On the same day, the Department of Justice (DoJ) served NVIDIA with several subpoenas.

They allege that NVIDIA is abusing its dominant position in the AI market, and (among other things) giving preferential supply and pricing to customers who exclusively use its technology.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

The effects on its business will be heavy: the increased scrutiny and operational adjustments will affect its day to day business. It will incur heavy legal and compliance costs, not to mention fines, sanctions and other penalties that could affect its financial and operational stability.

As an example – Big Blue (IBM) was subject to anti-trust laws (which are binding on US companies worldwide) between 1969 and 1982 when the case was dismissed. During those 13 years it had a major effect on how IBM did business.  But that’s another story.

Heather Cullen Blog In The Money ITM Strategy Warren Buffett Buffetted by the Market

ITMeter

Heather Cullen Blog ITMeter

Cheap(er) ITM Books

I have now made all the books available on this website in PDF form, slightly cheaper than the Amazon price. Here’s the link: ITM Book Store  Bookstore – Heather Cullen : In The Money Online

The week ahead . .

Well, on the positive side Goldman Sachs is predicting a significant inflow of capital ($85 billion) starting this week as investors return from the summer break and reposition their portfolios for the last Quarter. Large institutional investors (pension & mutual funds) usually make big investments to meet their year-end targets. I would expect this to be positive for the market – but we’ll see!

Futures

The futures look somewhat positive, but it is 9 hours to market open.

Fingers crossed for a good week!

Heather

Questions & Answers

24 Responses

  1. Politics: I guess neither side wants to talk about the 35 trillion in debt or how to solve it…
    Market: In a strong bull market one could take a monkey throwing darts at the financial newspaper and be just as good as any financial analyst. Problem is where can you find a good monkey willing to throw darts.
    R

    1. Heh, heh! But your are right about the debt – i think I read the other day that the repayments were bigger than defence and medicare funding together. Could have that wrong, but it was some increadible amount.
      Who knew you couldn’t print money with no consequences?
      h

  2. Dear Heather,
    Thank your for mentioning about Warren Buffett. He has been investing in the stock market for eight decades since his teen years from 1942. He admitted to making a few mistakes such as buying Berkshire Hathaway stock as a textile company which cost him $200 billion in money loss. Another mistake of his is not to invest in Amazon. In the 1970s, actually his wealth went down but he stayed the course until 1980s when he became a billionaire and instead of retiring, it was just the beginning for him. We can learn a lots from him in that aspect. Live well and do good works.
    Sincerely,
    George Henry Halongton

    1. HI George – I didn’t realize that he thought that buying Berkshire Hathaway was a mistake – and I remember someone telling me about him rejecting Amazon and all dot-coms’ way bach 26?27? years ago.
      Thank you!
      h

  3. I just finished ITM Bull and loved it. I am wondering if you have ever used the same methodology on other assets. Specifically, sector ETFs and bonds and commodities, etc… I am wondering if this would also work on assets that are uncorrelated because essentially this is trend following with deep in the money calls. What are your thoughts? Also, I just ordered some of your other books and look forward to reading them also!
    Michael

    1. Hi Michael,
      The same methodology could certainly be used – just that we don’t know the results!
      The reason it works on indices is that this is the whole of the market, a massive number of people and made up of a large number of stocks (500). This makes it easier to predict – crowd psychology7, the law of large numbers etc. Individual companies can make bad decisions which can disastrously affect the share price, and are also subject to people’s perceptions. Indices are relatively immune from this because they always hold the top stocks – and have a turnover of around 5% every year, getting rid of underperforming stocks and adding new ones with better performance.
      Personally, I use ITM on SPY, but also on QQQ and of course SPYG so that I can share the feelings of any readers invested in it!
      Thank you for your kind words, glad you enjyed the books!
      h

  4. Buffett’s return has not been great in recent years, no doubt. He has been spectacularly outperformed by Stanley Druckenmiller to say the least but who hasn’t been outperformed by him and the likes of him. Buffett’s mode and structure of his Company and now enormous size probably hinders his performance in relation to what it was before when Berkshire was smaller. Nevertheless his moves should not be dismissed out of hand and ignored. He must maintain many positions in the Insurance unit which is very large and limiting. Still granted he ain’t what he used to be. Problem is the positions of these Titans of Finance as reported are reported in the past tense. The next day after reporting the position it might be gone from their portfolio or they have started the process of reducing the position or increasing another position. Follow your Charts and Heart and Heather if you need help and Good Luck everybody in this tough, to me, Market.

    1. Hi Tommy – I wasn’t really dumping on Buffett, just that he is held up as such a great example to make the rest of us feel inadequate, so someties it is good to actually look, see what we can emulate, and see what we can ignore.
      Yes the market is not easy – turbulent times produce a turbulent market and we keep getting surprise after surprise. Hopefully it will settle down after the election.
      And I hope that you are feeling a little better about your account after today – was rather nice!
      h

      1. I am at the age that I don’t sweat it as much as I used to but some mistakes still sting. We always play for keeps. I did not think you were dumping on Warren and you are absolutely right in what you said about his returns. I don’t hold with people that seem to live and die by his every word or move. They need to be learn to Trade on their own and not try to emulate anybody. Be your own Man or Woman like you have. Find your own path. I noted this morning his vice chair Ajit Jain, I believe, sold a large portion of his Berkshire shares and he is only 73.

  5. Hello Heather,
    All your books, it’s content and your weekly insights are highly appreciated.
    No biases, easy analysis and sound (back tested) beliefs.
    Wanted to add a note that in the ITMB book, I laughed way too much with the bear image of buying the bear.
    Lastly, a mention of percentage drawdown in the books, could help visualise the pain of drawdowns. Of course nothing prepares one for a 30 percent drawdown.

    Best,
    Jose

    1. HI Jose
      thank you! And i’m glad you liked the images – i tend to do them to amuse myself and often wonder if anyone else likes them – so thank you!
      Re the drawdown % – I agree drawdowns, especially big ones, are hard to take. It is so easy to just break and say ‘i can’t take the pain any more’ and sell. But if you always sell at or near the bottom you are guaranteed to reduce your account. I know on the hard days you just don’t want to look at your account – I actually don’t, I always look at the charts. I can work out in my head how much I have lost and that is enough pain without actually looking at the figures. That said, I very much enjoy looking at the accounts after a day like today. Big smiles all round!
      I am not planning on updating the books until next year – the idea is to get the data to the end of 2024 and update with that. So I will keep your idea in mind!
      Thank you!
      h

  6. I don’t know how to do a less manual back test – would it be safer to pair the DITM long Calls with DITM long Puts during a sell-off market correction (Not bear market yet).

    Would highly appreciate your thoughts,
    Jolly

    1. Hi Jolly
      there are instructions on how to create a back testing system on Excel here: https://heathercullen.com/backtesting/ in the PDF ‘download back testing documentation).
      Re DITM long puts – we have looked at that in quite a few of the blog posts, and have never found one that is effective – basically, you are paying for insurance, but the premium is so high it isn’t worth it.
      And no, we’re not in a bear market yet, SPY has to drop to below $448, so we are not even close right now.
      Hope this helps
      h

  7. Oh, I now see that you have your books also here available to buy directly in pdf format, great, much better for me than Kindle format !
    Just bought my second one (ITM/Bear) here i.o. on Amazon, thank you !

    About Mr Buffet, I had the same impression since I noticed in 2014 the growth rate seriously reduced. I also saw his investment philosophy is a bit over-conservative (not understanding digital technology and the value of its semantic networks), but your analysis now shows how the huge fortune comes from the sheer number of years since he started. Interesting.

    1. Hi Renaat – i feel a bit silly about not putting the books on the website before, but I remembered the agreement with Amazon that if they were going to put them on KDP them then they were not to be available elsewhere. I only recently went back and looked at the contract – to find that that clause had an expriy of 90 days! I should have been more careful in checking it.
      Yes, Mr Buffett – 83 years in the market! Not many people will ever match that!
      h

  8. Hi Heather,

    I would like to save the charts on this website and not sure on how to do this.
    Can you please advise.

    As always, I cannot thank enough on how much I am gaining from your blogs.

    1. Hi Kishore – not sure if you mean the charts in the blog? or the Charts on the chart page?
      – If it is on the blog, right click on the image and choose ‘save image as;.
      – If it is the chart pages then look at the top right hand corner of the chart and you will see a camera icon which takes a snapshot and download or copy.
      Hope this helps
      h

      1. Hi Heather,
        I should have been more clear in my ask. So on this website I add Moving average ribbon and select only 10 SMA and 200 SMA but then everytime I visit this website I have to follow these steps. Is there any way I can save my indicators settings
        Thanks
        Kishore

        1. Hi Kishore,
          The version of the charts on this website unfortunately does not have that functionality. However, I believe that you can get a free account at TradingView.com that gives you access to more features including saving indicator settings.
          Hope this helps.
          h

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