Warren Buffett versus the Retail Investor
Warren Buffett is touted as one of the world's greatest investors. Obviously he has a much larger portfolio value than any of us, but how is his portfolio structured as compared to a Canadian Retail Investor? Is his risk tolerance likely higher than a Canadian retail investor?
The Canadian Retail Investor
The typical retail investor, if working with a financial planner, would begin with a questionnaire to determine how much risk they can take. I can tell you that in my experience, I have yet to meet an investor that would be comfortable with the risk level of a 100% equity portfolio. That's because the retail investor's loss aversion is typically quite low. Loss aversion is a person's tendency to prefer avoiding losses to acquiring equivalent gains i.e. it is better to not lose $5 than to gain $5. You can search for many articles on the internet about this but what I find is that a 10% loss is twice as painful as a 10% gain is joyful.
So once the risk profile is determined, an Investment Policy Statement, IPS, is produced which documents this risk and describes the portfolio and its characteristics in great detail. It will most likely be a balanced portfolio using cash, bonds and equities. Cash and bonds dampen the volatility and portfolio loss such that in a market downturn, the investor does not panic and sell. The "Periodic Table of Annual Returns for Canadians" below shows various asset classes and how they have performed over different calendar years. I highlighted just one sector, "Emerging Markets", to illustrate that all securities go up (or down) all the time and the best area to invest changes all the time. Diversification is the key by not having all your eggs (or investments) in one basket.
Also note that for US equities (orange boxes) in the chart above is represented by the S&P 500. The S&P 500 holds the 500 largest US companies (by market capitalization). That sector alone gives you a lot of diversification in your portfolio.
Warren Buffett is the man behind Berkshire Hathaway. Even though he is in his 80s, he holds all US equities made up of about 50 stocks.
Please spend some time on the Berkshire Hathaway Portfolio Tracker provided by CNBC. It has all the latest commentary about Warren, his outlook, his holdings and so much more.
His approach is not to have a diversified strategy but one of concentration. While his long term performance is well documented, the recent market downturn really demonstrates his risk tolerance. The chart below shows Berkshire Hathaway's (BRK-B shares) portfolio during the COVID-19 Global Pandemic. In early 2020, the price in February 2020 looked to hit a high of about $230 per share and then towards late March it was down to close to about $162 per share. How many investors would be comfortable holding a portfolio that declined about 30% over that timeframe?
Below is a live chart of the Berkshire Hathaway portfolio showing the performance over the past several months.
The typical retail investor does not have a portfolio constructed at all like Warren Buffett/Berkshire Hathaway because they don't have the same risk profile. It takes great intestinal fortitude to buy when things look bleak but he has done some of that during this COVID-19 pandemic. Here are a few examples and you can click on the links to read more about those securities recently purchased.
- Delta Air Lines, which is as of April 2, 2020
- Southwest Airlines, which is as of April 2, 2020
- DaVita, which is as of March 16, 2020
- Bank of New York Mellon, which is as of April 8, 2020
- Occidental Petroleum, which is as of April 15, 2020
Warren Buffett's Berkshire Hathaway is a concentrated portfolio of US securities whereas a Canadian retail investor is likely more diversified holding cash and bonds to dampen the volatility of the portfolio. You give up some upside return but it also provides a cushion during a market downturn and a smoother ride over the long term.
Below are also a few interesting articles showing that Warren Buffet aka Berkshire Hathaway hasn't always been the top investor.
- Even Warren Buffett Can’t Nail the Bottom
- Even Warren Buffett can't beat the stock market (BRK.B)
- Buffeted Performance