Stephen Gandel has been a busy man. The senior writer for Time Magazine published a long, glowing article in Fortune on the success of Warren Buffett’s hand-picked successors last October.1 Not three months later, Gandel was up to the challenge of writing another article, this one blasting the same two Berkshire Hathaway portfolio managers for poor performance.2
If you’ve ever been to one of our investment seminars, you may recall the bit where we discuss the difficulty of identifying and investing with successful fund managers. We contend that performance is not persistent, and that this year’s successful fund manager has no better chance of beating the market next year than his peers.
We illustrate this with an example of a fund manager who did consistently beat the market – Peter Lynch. Between 1977 and 1990, he grew Fidelity’s Magellan fund from $18 million in assets to more than $14 billion, with an average annual return of 29.2%. But Lynch has been retired for 25 years. You can’t invest with him. The key to successful investing seems simple enough, though. Find the next Peter Lynch. How hard could that be?
This is where we note that Lynch’s final assignment for Fidelity was to find his successor, the new manager of Magellan Fund. Ever hear of Morris J. Smith? Not quite a household name, but that was the guy pegged by Lynch to run the fund. Smith lasted 26 months in the position. He did well during his tenure, but was no Lynch. Magellan has burned through several other managers since Lynch left, including Jeffrey Vinik, whose decision to move out of technology just before the tech boom led to Magellan’s first year being beaten by its peers, and Robert Stansky, whose 238% return over 9 years failed to beat the S&P 500 over the same period (274%).
Our conclusion: The most successful fund manager in history couldn’t pick a successful fund manager. Why do you think you can? Why do you think your advisor can?
Now we have a bit more grist for the “you can’t pick a good fund manager” mill. In just three months, Ted Weschler and Todd Combs have gone from Warren Buffett’s silver dollars to wooden nickels. The earlier Fortune article, “Buffett’s stock pickers are beating the market,” said that in 2013, Weschler’s large investments in DirecTV and DaVita Health paid off, propelling his portfolio to a 31% gain for the year. Combs’ performance had been even better during his four years at Berkshire, with a cumulative return of 116% (over a period when the S&P 500 was up 55%) and a 2013 return of 51% thanks to investments in MasterCard, Visa, Viacom and General Dynamics.3
Buffett’s famous annual letter to shareholders in April 2014 touted Weschler and Combs for “handily” beating the market. On CNBC that month, Buffet said the duo “both have a fundamental combination of soundness and brilliance.” Gandel was also laudatory. “Both seem to have a knack for catching stocks near their lows,” he wrote last October.
Fast forward a whole three months, and it appears a little polish has worn off the knack. Gandel’s January article for Fortune is titled “Warren Buffett’s investing successors blew it in 2014.” By Fortune’s calculations, Weschler’s fund rose 6.7% in 2014, well short of the S&P 500’s return of 11%. One of his worst decisions was to add $100 million to his position in General Motors despite massive recalls. GM lost 15% for the year.
Combs’ fund was actually down 0.3% for the year. His largest holding, Chicago Bridge and Iron, lost half its value, and Viacom, one of his top picks as of last October, plummeted to a 15% loss. Time to update our seminar. Now we can add “if neither Peter Lynch nor Warren Buffett can pick a successful fund manager, what chance do the rest of us have?’ All the more reason to map out an investment strategy that doesn’t rely on the luck factor.
In last year’s letter to shareholders, noting that Weschler and Combs had beaten his own performance the prior two years, Buffett joked if they continue to “humiliate” him, “I’ll have no choice but to cease talking about them.” For a different reason that may well happen.
1 “Buffett’s stock pickers are beating the market,” Stephen Gandel, Fortune Magazine, October 14, 2014
2 “Warren Buffett’s investing successors blew it in 2014,” Stephen Gandel, Fortune Magazine, January 13, 2015
3 Actual figures by fund manager are not available from Berkshire Hathaway. Stock picks and fund returns are based on Fortune’s research. Buffett has confirmed that Weschler’s actual performance exceeds Fortune’s estimates.