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Why Warren Buffett Plays Defense

This week’s market sell-off caused some investors to lose sleep, but not Warren Buffet. Why not? The answer can be found in the 2009 Berkshire Hathaway Annual Report with his letter to the shareholders (
For the 45 years from 1964 to 2009, Berkshire increased its book value at 20.3% compounded annually as compared to 9.3% for the S&P 500, or an astounding value-added for the shareholders of 11.0% compounded annually. How did Warren Buffett do it? Buffett explains in his own words, “[Berkshire Hathaway has] lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that’s likely to continue.” The table on page two provides an excellent illustration of this statement and makes one thing clear to us - if you invest in a portfolio of high quality stocks, that portfolio will consistently outperform the S&P 500 in down markets, but is likely to sometimes lag the market in strong up markets, however in the long-term high quality stocks win.

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