January 22, 2012

How to beat Warren Buffett?

Warren Buffett's (no introduction needed) current net worth is about $50 billion and he has a quite good track record from the financial markets. But is it possible to beat that track record? Daniels Trading says it is possible, not by investing in stocks as Warren Buffett did, but by using the art of "Trend Following."

The essence of Trend Following, or "Managed Futures" as it is sometime called, is to buy when you think the trend is up, and sell when you think the trend is down. You do not care about P/E-ratios, the Greece economy, or whether an analyst at Goldman Sachs thinks the stock is undervalued. You only care about the price of the asset. If you want to read more about famous fund managers who are using trend following, you can look at these earlier articles from Trejdify:

What Daniels Trading has done is to compare Berkshire Hathaway (Warren Buffett's company) with different Trend Following companies from 1996 to 2010. This range includes the Internet bubble of 2000 and the Credit crises of 2008. Companies who managed to make money despite these two bursting bubbles are probably good at what they do. This is the result:

Source: Beating Warren Buffett

One can clearly see that the companies who are using Trend Following as their method to make money, did beat Warren Buffett. What is interesting is that - in total - 46 Trend Following companies did beat Warren Buffett (all of them are not in the chart above). 

Daniels Trading also calculated the worst draw-down during this period. This is the result:
  • S&P500: -52.56%
  • Warren Buffett: -44.49%
  • Trend Followers: -14.22% to -32.82%