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, Buckingham (74 clicks)
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In my prior post, we discussed why investors should not put all their eggs in Buffett's basket. Today we'll discuss Buffett's Graham and Doddsville speech.

"The Superinvestors of Graham-and-Doddsville" is an article by Warren Buffett promoting value investing. The article was based on a speech given on May 17, 1984 at the Columbia University School of Business in honor of the 50th anniversary of the publication of Benjamin Graham and David Dodd's book Security Analysis. It was published in the Fall 1984 issue of Hermes, the magazine of Columbia s Business School.

The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds that had outperformed the market over the long term. Each of the nine funds were managed by Benjamin Graham's "alumni," pursuing different investment tactics, but following the same "Graham-and-Doddsville" value investing strategy.

Buffett argued that if these long-term winners belonged to a group of value investing adherents, and they operate independently of each other, their success was more than a lucky outcome. It would be the triumph of the right strategy. Buffett presented the evidence showing how each of the investors had trumped the market by wide margins.

Previously, we looked at how Berkshire Hathaway (NYSE:BRK.A) had performed over the past five, 10 and 15 years. I thought it would be interesting to look at how some of the other super investors have performed over the same periods. Morningstar provides us with the returns of both Sequoia Fund (SEQUX) and Tweedy Browne Value (TWEBX).

1999-2013

5-Year Annualized Returns (%)

10-Year Annualized Returns (%)

15-Year Annualized Returns (%)

SEQUX

18.7

8.9

7.5

TWEBX

13.9

6.3

5.6

Vanguard 500 Index (VFINX)

17.8

7.3

4.6

U.S. Large Value (DFLVX)

21.0

8.9

8.1

U.S. Small (DFSTX)

23.8

10.2

10.8

U.S. Small Value (DFSVX)

22.9

10.0

12.3

Real Estate (DFREX)

16.4

8.2

10.4

Equal-Weighted Fund Portfolio

20.6

9.1

9.5

We begin our analysis by first looking at the performance of the Sequoia Fund.

  • For the most recent five-year period, SEQUX underperformed three of the five passively managed asset class funds, and specifically underperformed the two value oriented funds by 2.3 percent and 4.2 percent. The equal-weighted fund portfolio returned 20.6 percent per year, outperforming SEQUX by 1.9 percent per year.
  • For the most recent 10-year period, SEQUX outperformed two of the five funds, matched the performance of the large value fund, and underperformed the small value fund by 1.1 percent a year. The equal-weighed portfolio returned 9.1 percent per year, outperforming SEQUX by 0.2 percent per year.
  • For the most recent 15-year period, SEQUX outperformed VFINX by 2.9 percent per year, but underperformed the other four. Specifically it underperformed the two value funds by 0.6 percent and 4.8 percent. The equal-weighted fund portfolio returned 9.5 percent per year, outperforming SEQUX by 2.0 percent per year.

Thus, SEQUX has underperformed simple diversified passive fund strategies for the past five, 10 and 15 years.

We now turn to analyzing the performance of TWEBX.

1999-2013

5-Year Annualized Returns (%)

10-Year Annualized Returns (%)

15-Year Annualized Returns (%)

TWEBX

13.9

6.3

5.6

Vanguard 500 Index (VFINX)

17.8

7.3

4.6

U.S. Large Value (DFLVX)

21.0

8.9

8.1

U.S. Small (DFSTX)

23.8

10.2

10.8

U.S. Small Value (DFSVX)

22.9

10.0

12.3

Real Estate (DFREX)

16.4

8.2

10.4

Equal-Weighted Fund Portfolio

20.6

9.1

9.5

  • For the most recent five-year period, TWEBX underperformed all five of the passively managed asset class funds, and specifically underperformed the two value oriented funds by 7.1 percent and 9.0 percent. The equal-weighted fund portfolio returned 20.6 percent per year, outperforming TWEBX by 6.7 percent per year.
  • For the most recent 10-year period, TWEBX underperformed all five funds of the passively managed funds, and specifically underperformed the two value funds by 2.6 percent and 3.7 percent. The equal-weighed portfolio returned 9.1 percent per year, outperforming TWEBX by 2.8 percent per year.
  • For the most recent 15-year period, TWEBX outperformed VFINX by 1.0 percent per year, but underperformed the other four. Specifically it underperformed the two value funds by 2.5 percent and 6.7 percent. The equal-weighted fund portfolio returned 9.5 percent per year, outperforming TWEBX by 3.9 percent per year.

Thus, TWEBX has underperformed simple diversified passive fund strategies for the past five, 10 and 15 years.

We can also look at Tweedy Browne's flagship fund Tweedy, Browne Global Value (TBGVX). Since the fund is a global value fund we'll compare its performance with that of four of DFA's value funds and an equally-weighted portfolio of the four. (Full disclosure: My firm Buckingham recommends Dimensional funds in the construction of client portfolios.)

1999-2013

5-Year Annualized Returns (%)

10-Year Annualized Returns (%)

15-Year Annualized Returns (%)

TBGVX

15.9

8.8

8.6

U.S. Large Value (DFLVX)

21.0

8.9

8.1

U.S. Small Value (DFSVX)

22.9

10.0

12.3

International Value (DFVIX)

12.7

8.0

7.5

International Small Value (DISVX)

17.0

10.8

12.0

Equal-Weighted Fund Portfolio

18.4

9.4

10.0

As you can see TBGVX under-performed the equally-weighted portfolio in all three of the periods.

Perhaps, like Buffett, these super investors have been burdened by the huge amount of assets under management. Or perhaps the markets have become more efficient over time. However you want to look at it, the super investors of Graham and Doddsville have been anything but super for at least the past 15 years.

Source: The Super Investors Of Graham And Doddsville