uploads///Warren Buffett Berkshire Hathaway

Can a Buffett Bot Mimic Berkshire Hathaway’s Returns?


Oct. 21 2019, Updated 1:04 p.m. ET

Berkshire Hathaway Chair Warren Buffett is probably the best value investor of our time. Meanwhile, Havelock London, a UK-based startup, is focusing on identifying value investment opportunities using quantitative techniques. Generally, quant trading is becoming associated with short-term trading.

Can Havelock London mimic the phenomenal returns Berkshire Hathaway has achieved over the last five decades? Or, on a more critical note, do we really need such a “bot” given Buffett’s recent underperformance? Let’s explore these questions in detail.

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Warren Buffett bot

The Financial Times recently reported on Havelock London, a startup based in the United Kingdom. Havelock London talks about value investing and quantitative strategies in one breath. A value investor looks at fundamental valuation, while quantitative trading focuses on technical parameters. Generally, quant trading is associated with short-term trades. Quant-based trading tries to identify mispriced assets using different parameters. Value investing, on the other hand, is a long-term strategy. A value investor would try to identify an asset that offers long-term potential and not necessarily a short-term profit opportunity.

In fact, Berkshire Hathaway (BRK-B) (BRK.B) chair Warren Buffett, who’s arguably the best value investor of our time, buys stocks on the assumption that markets will close the next day and stay closed for five years. On the contrary, a quant trader might square off a position within minutes. On the face of it, Havelock London’s strategy looks attractive, as it tries to offer the best of both worlds. However, let’s look at it from a critical perspective.

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Berkshire Hathaway’s performance

To be sure, under Buffett’s stewardship, Berkshire Hathaway has delivered splendid returns. However, and as we’ve said repeatedly, almost all of Berkshire’s outperformance happened in the last century. Berkshire Hathaway has underperformed the markets this year, and its returns have lagged the S&P 500’s in the current bull market. Recently, a long-time Berkshire Hathaway shareholder sold his shares, blaming Buffett for the company’s underperformance. For now, let’s dwell on the value investment strategy, as in general, growth stocks have outperformed value stocks over the last decade.

Growth versus value

We’re in the longest bull market in history, so it would be fair to expect value stocks to underperform growth stocks. Meanwhile, some analysts have been saying value investing is dead. Earlier this year, Bernstein’s head of European quantitative strategy, Inigo Fraser-Jenkins, expressed his views on value investing. To sum it up, he blamed lower interest rates and technology for value investment strategy’s demise.

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Warren Buffett

Buffett is unaffected by the Federal Reserve’s decisions. With that said, however, prevailing interest rates do affect asset prices. Low interest rates over the last decade have helped fuel asset prices. Furthermore, one of the reasons Buffett hasn’t been able to find his next “elephant” is that there’s too much cheap money in the financial system. With too much money chasing too little quality, it becomes tough for a value investor to outperform.

Speaking of value investing in general, there’s little denying that Buffett’s performance has lagged the markets over the last decade. This year has been especially terrible for Berkshire investors from the standpoint of stock market returns.

Berkshire Hathaway’s performance

One of the drivers of Berkshire Hathaway’s 2019 underperformance is the massive cash the company is sitting on. Given the current markets and the outlook, there might not be many investment opportunities for a value investor such as Buffett. However, in my view, value investing is not dead as some may say. On the contrary, given the economic outlook, this could be the best time for value investment. As Buffett might say, with so much pessimism surrounding value investment, it might be the time to get “greedy” about value investment strategy.

As to our question of whether a bot or a quant strategy can mimic Berkshire’s returns? It’s tough—if not impossible—to achieve the kind of outperformance Buffett has managed in the last century. Even he expects Berkshire Hathaway’s future returns to be only slightly higher than the S&P 500’s (SPY). Given these expectations and rapid technological advancements, a quant-based value investment strategy might be a tough match for value investors.


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