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Former Morgan Stan”Barton M. Biggs” , chairman of Lee Investment Management, said: “There are only two truly great investments in the world. Or they are Svensson and Buffett. “
Why are they so praised? Excellent investment performance, created a unique investment model and widely disseminated and inherited investment ideas, etc. What are the similarities and differences between these two investment giants? Who is better? Can we ordinary investors copy their legend?
Directory:
1. Investment performance
2. Performance attribution analysis
3. Similarities and differences between the two
4. Investment miracles that cannot be copied
5. Advice for ordinary investors
Investment Performance
Buffett:
Warren Buffett (Warren Buffett) Born in Omaha, Nebraska, USA in August 1930. During that time he showed sensitivity to numbers. In 1950, he was admitted to Columbia University’s School of Business, and he became known as “the father of value investors” Benjamin Graham. Under Graham’s door, Buffett was like a fish.
In 1962, Buffett bought the first Berkshire stock. In early 1965, Buffett gained control of Berkshire. Since then, the nature of Berkshire’s business has changed. It is no longer a pure spinning company, but an investment entity. Buffett uses it as an operating platform, constantly acquiring other profitable companies and equity, creating investment myths.
From 1965 to 2018, the compound annual growth rate of Berkshire’s book value was 18.7%, significantly exceeding the S & P 500’s 9.7%. From 1964 to 2018, Berkshire’s overall growth rate was 1,091,899% (that is, more than 10918 times) , while the S & P 500 index was 15,019%. This is just an increase in book value. The growth of Berkshire’s intrinsic value is much higher than its book value.
Data source: “WarrenBuffett’s Letters to Berkshire Shareholders, 2018”
If you bought Berkshire stock for $ 10,000 in 1965, after Buffett’s 53 years of operation, its market price has now become about $ 247 million-it is worth mentioning that this is tax After income!
Svensson
David Swenson (David F. Swensen) Born in River Falls, Wisconsin, USA in 1954. After graduating from the University of Wisconsin-River Falls, Svenson entered Yale University’s Department of Economics for a PhD in economics, and studied under Nobel Economics winner Tobin. His main research direction is the valuation model of corporate bonds.
After receiving his Ph.D., Svenson worked for 6 years on Wall Street, 3 years for Lehman Brothers, and 3 years for Solomon Brothers. His main job at that time was to develop new financial technologies. At the Solomon Brothers, he was involved in constructing the first currency swap transaction.
In 1985, Svenson was dug back to Yale by Yale principal WilliamC. Brainard and managed the school ’s $ 1 billion alumni donation fund (endowment fund) . In the 35 years from the takeover of the Yale Endowment Fund in 1985 to the 2019, the Yale University Fund has grown from an initial $ 1 billion to a mid-2019$ 30.3 billion, a nearly 30-fold increase.
Data source: Yale Investments Office
Comparison of the two
Two rounds of Buffett’s senior Svensson (24 years) , entered the investment field earlier, even if not counting the early Buffett partners The company also has an investment track record of more than half a century. By comparison, Svensson’s track record is much shorter. This comparison may be biased, but it is certain that both of them outperformed the performance benchmark of the same period.
Yield characteristics of the 60/40 combination of Buffett, Svensson, and U.S. debt
Nevertheless, let’s compare them a bit. It is clear from the table above that Buffett’s annualized return is better than Svenson’s, while Svenson’s volatility is lower. Buffett’s concentrated investment does not focus on decentralization. This investment is characterized by high returns and greater volatility. As the manager of the University Endowment Fund, Svenson must ensure that the endowment fund provides stable support for Yale University expenditures, and that the return on the investment portfolio cannot fluctuate significantly.
Analysis of Performance Attribution
Let’s analyze the investment performance of the two separately.
Buffett
Warren Buffett is the representative of concentrated equity investment, with few and fine investment cases. The success of these “batches” relied on the power of compound interest to push Berkshire into the top ten of the market value of US listed companies.
Hi poem candy
In 1972, Buffett spent the name of the blue-chip printing company (soon merged into Berkshire Hathaway) $ 25 million acquisition of See’s Candies .
The average annual sales volume of Xi Shi Candy has been increasing slowly, and the net profit has skyrocketed due to the increase in unit price.
In a letter to shareholders in March 1984, Buffett said: Xi Shi candy is much more valuable than its book value. It is a branded company whose products can be sold at prices higher than production costs, and will continue to have this pricing power in the future.
When Buffett looks back at the acquisition of Hessie Candy, he sees it as a fantastic business. From 1972 to 2007, it contributed $ 1.35 billion in pre-tax profits to Berkshire, consuming only $ 32 million of which was used to supplement the company’s operating capital. After paying corporate profits tax, the remaining funds are used to buy other attractive businesses.
The Hessian Company has brought many new sources of cash to Berkshire, as Berkshire described it in the Bible: “It is rich and fertile.”
Government Employee Insurance Company (GEICO)
In 1976, Buffett bought $ 4 million of government employee insurance company (GEICO) stock. In 1980, Buffett bought GEICO stock again, holding a total of 7.2 million shares, accounting for 33% of GEICO’s total share capital.$ 47.14 million. In the 15 years since 1980, GEICO has continuously repurchased the company’s shares, and Berkshire’s share has continued to increase. In 1995, Berkshire’s stake increased to 50%, and it spent $ 2.3 billion to acquire the remaining 50%. After owning all the equity, GEICO continuously contributed free insurance float to Berkshire for investment, helping Berkshire’s net asset value grow rapidly.
Buffett has a deep relationship with the government employee insurance company (GEICO) . Back in 1950, Buffett visited GEICO while he was a Graham student. David, then GEICO’s vice president, hosted Buffett and spent about 4 hours explaining to Buffett in detail the operating model of the insurance company and telling Buffett The core competitive advantage of GEICO is the low cost advantage brought by the direct sales model.
If GEICO is a highly valued commercial castle, then the cost and expense difference between it and its peers is its moat.
Coca-Cola
In 1987, Coca-Cola was in trouble due to the conflict between bottlers provoked by Pepsi, and its stock price was relatively low. In 1988, Buffett began buying a large number of Coca-Cola shares. At the end of 1988, he held a total of 14.17 million shares at a cost of 592 million. In 1989, it continued to increase its holdings, and the total number of shares doubled to 23.35 million shares at a total cost of 1.024 billion. In 1994, Buffett bought another $ 270 million worth of stock.
To date, Coca-Cola is still Berkshire’s heavy storage stock, accounting for 9.79% of the total holdings, holding 400 million shares, with a market value of more than 20 billion US dollars, and receiving a total dividend of about 6 billion US dollars.
Buffett has a real love for Coca-Cola. At a Berkshire shareholder meeting, Buffett stated that he drank Coca-Cola every day and has been using this lifestyle since 1982. “If I only eat healthy vegetables such as asparagus and broccoli every day, I can live another year. Drinking cola and eating chocolate every day can make me happier but I want to live a year off. Then I am willing to exchange my life for such happiness This is my choice. “
Coca-Cola is a great company, and management cares about shareholders’ return on capital and tangible cash returns. The company can not only operate asset-light business, but also obtain extremely strong profitability. The company’s growth has a long history of continuity, and the prospects for the next few decades are clear. Coca-Cola was categorized by Buffett as “eternal holding.”
Other classic cases scattered in Berkshire’s annual report are:
Washington Post, which started buying in 1973, had an equity replacement in 2014 with an annualized return of 12%;
Scott Fitzer, bought in 1986, contributed a total of US $ 1.03 billion in dividends to Berkshire by 2000;
Fangdimei, which was bought in 1988, was sold in 2000, with a total pre-tax income of about $ 3 billion;
The PetroChina H shares purchased in 2003 were sold in July-October 2007, and the pre-tax investment income was approximately US $ 3.55 billion;
Wait.
Every live case is not only a string of outstanding investment achievements shining in the world, but also contains changes in investment philosophy and Buffett’s investment thinking.
Warren Buffett is a great business learner who can quickly and accurately identify the key to a company’s complexity. He can veto an investment in two minutes, and can make major investment decisions within two days of analysis. He is always ready, as he said in the company’s annual report: “Noah did not wait to start building the ark when it rained.”
He doesn’t care about the short-term stock market trend, and emphasizes that determining the company’s intrinsic value and a fair and safe price are the elements of investment. He never invests in a company he doesn’t understand or outside of his circle of competence. In the 1990s, he pointed out that in his 40-year career, the results of 12 investment decisions have made him different.
Svensson
The outstanding performance of the Yale Endowment Fund under the leadership of Svenson mainly comes from the “Yale Model” pioneered by Svenson.
In the mid-1980s, about 50% of the assets of the University Endowment Fund were invested in domestic securities, basically stocks; 40% of the assets were in fixed income, including cash products; the remaining 10% were invested in alternative investment vehicles. Svenson believes that such a portfolio is unreasonable: first, the portfolio is not sufficiently dispersed; second, in the long run, stock returns far exceed fixed income products. The university fund is a long-term enterprise. To maintain the purchasing power of assets and to maintain it forever, a large proportion of fixed income allocation will not achieve this goal.
So, Svenson ’s transformation of the Yale Endowment Fund was moved to a more decentralized, equity-oriented (equity-oriented) ‘s portfolio.
In the past 30 years, the proportion of Yale Endowment Funds’ asset allocation has changed. Data source: Yale Investments Office
The Yale Endowment Fund defines the eight types of assets in the above picture based on the expected response to economic conditions such as economic growth, price inflation or changes in interest rates. Assign weights in portfolios by considering their risk-adjusted returns and correlations and adjust them annually to achieve mean-variance optimization (mean-variance optimization) (Efficient portfolio frontier) optimal configuration.
As can be seen from the figure above, in the past 30 years, the Yale Endowment Fund has gradually allocated funds to non-traditional asset classes, which has greatly reduced domestic stocks. (DomesticEquity) . In 1989, nearly three-quarters of endowment funds were invested in US stocks, bonds, and cash. Today, domestic securities account for less than one-tenth of the portfolio, while foreign stocks (Foreign Equity) , private equity < span class = "text-remarks" label = "Remarks"> (Private Equity) , absolute return strategy (Absolute Return strategies) and physical assets (Real Assets) account for 90% of the endowment fund portfolio % +.
Yale’s Endowment Fund Portfolio Assets Performance in the Past 10 and 20 Years. Date of data: As of the financial year of Yale Endowment Fund 2019, data source: Yale Investments Office
The significant allocation of non-traditional asset classes by Yale Endowment Funds stems from their return potential and diversity. Compared to the 1985 portfolio, today’s actual portfolios have much higher expected returns and much lower volatility.
It is worth noting that among these 8 types of assets, in addition to the fixed income (FixedIncome) Yale Investment Office selects internal management, and other types Asset classes are looking for external fund managers to make active investments. The reason for this arrangement is that the expected return on fixed income assets is the lowest of the eight asset classes of the endowment fund. In addition, the government bond market is arguably the most priced asset class, with little opportunity to add significant value through active management.
As shown in the figure below, due to the high efficiency of market pricing, the difference in returns between domestic fixed income funds in the United States is very small. The annualized performance difference between the first and third quartile funds is only 0.8%.
The quartile distribution of annualized returns of major asset active funds in the past 10 years. Date of data: June 30, 2002 to June 30, 2012. Source: Yale Endowment Fund’s 2012 Financial Year Report
This figure also explains why Yale Fund chose non-current equity assets as the focus of investment. In the illiquid asset market, some asset pricing is often inefficient and there are better investment opportunities. Some investors can obtain excellent investment performance by virtue of their professional advantages.
Compared with other large asset funds, the returns of alternative asset funds show significant dispersion:
The difference in annualized performance of the 1st and 3rd quartiles of leveraged buyouts is 13.8%;
The annualized performance difference between the 1st and 3rd quartiles of natural resources is 17.4%;
The annualized performance difference between the 1st and 3rd quartiles of real estate funds is 19.1%;
The annualized performance difference between the first quartile and third quartile of venture capital is 19.8%.
In comparison with the selection of top managers in the secondary market, Yale Endowment Funds can obtain higher returns by selecting top managers in alternative assets. But once you make a mistake, the results can be very disappointing.
So in addition to constructing investment portfolios based on academic theory: mean-variance model and performing large-scale asset allocation in the “Yale Model”, we must also strictly screen external fund managers and establish investment cooperation with outstanding external fund managers relationship. The Yale Investment Office meets countless external fund managers each year and then narrows it down to those particularly attractive candidate fund managers. Several rounds of talks and countless layers of due diligence were then used to assess the potential of external fund managers. A successful external fund manager once joked that Yale’s investment office dug so deep that he even interviewed his third-grade teacher.
Once the fund manager is selected, the Yale Endowment Fund will establish a long-term partnership with it, and the general cooperation period is 10 years. A PE fund manager has been a close partner of Yale for 30 years.
It is worth mentioning that Svensson from the 2008 financialThe crisis learned an important lesson: about portfolio liquidity. Because the liquid assets of the Yale University Fund were insufficient at the time, the opportunity to buy illiquid assets at a low price at the bottom was missed. Although I copied the bottom, I wanted to buy more. So after that, Yale ’s asset allocation target restricted non-current assets (including leveraged buyouts, natural resources, real estate, and venture capital) About 50%.
Data source: Yale Investments Office
A significant achievement of the Yale model is the establishment of a complete set of institutional investment processes and rigorous investment principles that are not influenced by market sentiment, including the setting of investment goals, the division and allocation of asset classes, and the choice of fund managers.
Svenson emphasized: Pursue long-term and sustainable return on investment after risk adjustment, investment income is driven by asset allocation, strict asset rebalancing strategy, and avoid timing operations.
In short, the equity-oriented investment strategy is the driving force behind Yale’s strong performance, and decentralized investment is a magic weapon for Yale University to achieve asset preservation.
The similarities and differences between the two
From the brief performance attribution analysis above, we can clearly see that Berkshire and Yale Endowment Funds have very different investment methods. Of course, there are similarities under closer inspection.
Different: Warren Buffett is an equity (Stock) Centralized investment, and Svensson is a large class asset allocation, diversified investment >.
Svenson ’s mentor, Nobel Prize winner James Tobin, won because he studied a financial theory. A reporter from The New York Times asked him to explain in simple terms why he won the prize. He replied, “Don’t put all your eggs in one basket.” But Buffett believes that investors should put all their eggs in In the same basket and then watch it carefully. Because he feels that in the case of limited time and resources, the probability of success with fewer decisions is naturally higher than that of investment decisions, as if the only child is always more cared for and more robust than the multi-child family .
Buffett believes that a concentrated investment portfolio will bring extraordinary returns, and excellent investments rarely appear. He has repeatedly told students that if they get a card that can only punch 20 holes at the beginning of their careers, which represents the total amount they can invest in their investment career, their investment results will improve. As he summarized in his 1993 annual report: “We believe that a more focused portfolio strategy will increase investor thinking about a business and increase his satisfaction with its economic characteristics before buying the business, Then this strategy is likely to reduce risk. “
Buffett ’s investment is basically US stocks (domestic stocks) , although there are investment opportunities outside the United States, such as China ’s PetroChina and BYD But his focus is basically on domestic stocks.
And Svensson is the standard academic. Yale’s portfolio combines academic theory and market judgment. The theoretical framework is a mean-variance model developed by James Tobin and Harry Markowitz, “the father of modern portfolio investment theory.” Yale uses statistical techniques to combine the expected return, variance, and covariance of investment assets, and uses mean-variance analysis to estimate the expected risks and returns of various asset allocation schemes, and the sensitivity of test results to changes in input assumptions. As a result, the portfolio involves more asset classes.
Asset allocation, timing, and securities selection are the main drivers of investment income and are commonly used portfolio management tools. Svenson believes that in terms of asset allocation, you should diversify your portfolio as much as possible and focus on equity investment; as far as market timing is concerned, try not to do so; and in terms of securities selection, you should focus on finding the parts of market pricing that are ineffective and Think carefully about your investment level before deciding to go beyond the market strategy.
In the general direction, Svenson’s decentralized investment and Buffett’s centralized investment philosophy form a sharp contrast. On the local side, however, there are similarities.
For each type of asset in the asset class, Svenson believes that the more inefficient the pricing market, the more likely it is that fund managers will get excess returns. Although the US stock market is highly efficient, he chose an active management strategy, tending to screen external fund managers, has excellent bottom-up fundamentals research capabilities, and sought out undervalued stock companies with promising prospects. This is the same as Buffett.
Svenson expressed his respect for Buffett during a speech exchange session:
And hope that the fund managers they work with have an investment style like Buffett. It also emphasizes that decentralization is good from the perspective of asset class, but it is still necessary to focus investment in an asset class.
Same: Both are long-term investments, not disturbed by short-term performance fluctuations. Be calm when faced with market doubts.
In the hustle and bustle of the capital market, there are a lot of eye-catchers: “The stock god Buffett walked down the altar”, “Yale model is untenable” and so on. In years when historical performance was below the market average, such doubts were even louder.
1. Buffett breaks through the bubble of science and technology stocks in 2000
Data source: “WarrenBuffett’s Letters to Berkshire Shareholders,