One share of Berkshire Hathaway Inc.'s stock, purchased for $18 on May 10, 1965 - the day Warren E. Buffett assumed control of the Omaha, Neb.-based holding company - was worth $71,000 on the last day of 2000, producing an annualized return of 26.18%.
To end up with $71,000 by investing in the Standard & Poor's 500 index during the same time period, one would have had to invest $1,383 - almost 77 times greater than the cost of one share of Berkshire Hathaway stock, generating a comparatively paltry 11.69% annualized return.
That $1,383 price tag is what Meir Statman calls the "value-in-hindsight" - the Dec. 31, 2000, value of the share discounted by the S&P's return back to May 10, 1965. Mr. Statman is the Glenn Klimek Professor of Finance at Santa Clara University's Leavey School of Business, Santa Clara, Calif.
But the question remains: How good are investors at picking winning stocks - or money managers - with foresight? Not very, concludes a paper by Mr. Statman and Jonathan Scheid, senior research analyst at Assante Asset Management Inc., San Jose, Calif. The paper, "Buffett in Foresight and Hindsight," will be published in the July/August issue of the Financial Analysts Journal.
Years after Mr. Buffett had established his reputation as an investor extraordinaire, experts still questioned whether he could duplicate his previous returns. In a 1989 article, Paul Samuelson, a Nobel laureate in economics, called Mr. Buffett a genius, Messrs. Statman and Scheid noted. While not recommending buying or selling shares of Berkshire Hathaway, Mr. Samuelson wrote: "Now that B-H has gone up more than a hundredfold, it is at a premium to book value. Buffett himself reports doubts that he can find opportunities comparable to those in the past."
Yet, if one purchased a single share of Berkshire Hathaway stock for $8,675 at the end of 1989, its value-in-hindsight was $14,671, almost double the price, Messrs. Statman and Scheid wrote.
There are other stocks that have done even better than Berkshire Hathaway. From the time the stock first appeared in the University of Chicago's Center for Research in Security Prices database on Oct. 31, 1976, $1 invested in Berkshire Hathaway would have grown to $1,044 by the end of 2000. But a single dollar invested on Oct. 31, 1976, in Mylan Laboratories Inc. would have been worth $1,545 by year-end 2000, while a buck invested in Applied Materials Inc. or Wal-Mart Stores Inc. would have reached $1,419, and $1,108, respectively, during the same time period. In contrast, $1 invested in the S&P 500 would have been worth only $30 at the end of the 24-year, two-month time period.
Hindsight can mislead investors into picking investments that are past their prime. While Fidelity's Magellan Fund outperformed the S&P 500 in 11 of the 13 years ending in 1989, it surpassed the index in only four of the following 11 years.
"The bias of hindsight that leads us to believe that we have seen Berkshire Hathaway's extraordinary performance with foresight also fools us into believing that we can identify the next Buffett and Berkshire Hathaway," the paper says. "We might identify, instead, the next WebVan, the next Enron, or any of the many stocks that peaked at tens, or even hundreds, of dollars before they were gone."
Pension executives and 401(k) participants alike who are pondering their next choice of manager might think twice before assuming a manager's stellar track record assures superior performance in the future.
