Is Buffett really such a wizard?

Warren Buffett

Friday, May 5, 2006

American Public Media

 

Billionaire investor Warren Buffett holds his annual shareholder meeting this weekend. Commentator and economist Austan Goolsbee says Buffett's reputation is overrated. Austan Goolsbee is a Professor of Economics at the University of Chicago Graduate School of Business, and a former student of Linus Yamane.


KAI RYSSDAL: Big times in Omaha, Neb., this weekend. Berkshire Hathaway holds its annual meeting. That's Warren Buffet's company. As in Warren the-second-richest-man-in-the-country Buffett. Shareholders will be treated to dinner and listen to Buffett explain how he's made all those billions of dollars. But for economist and commentator Austan Goolsbee, the message doesn't ring true.

AUSTAN GOOLSBEE: Turns out, I couldn't get into Gorat's Steakhouse tonight, even with $42 billion. Problem is, that's Warren Buffett's favorite restaurant and it's full.

But I wish I could. I'd tell the shareholders to watch their wallets.

See, I'm an economist, and it always sticks in my craw when people say Warren has the Midas Touch.

That's because the one thing that professors pound into young economists is that the only investors who beat the market are ones who get lucky or else take risk.

You get data shoved in your face showing the people who did well last year aren't any more likely to do well this year. In fact, about 80% do worse than the market average. The heroes only appear after the fact, which means they got lucky.

The dismal science says to just invest in index funds because they charge low fees and give you the market average.

The problem is, no one in the real world seems to believe that. I mean the Omaha billionaire earned twice the market return from 1965 to 2003. Surely this man disproves the naysayers.

And that's where I come in. See, heroes are just more fun than index funds. So, I gave in to temptation.

In 2003, I bought one share of Berkshire Hathaway — the cheap kind, not the $80,000 one, and waited for payday. Since then my share is up 20%. The index fund I didn't buy is up more than 30%.

Warren, give me something I can use, man. You were supposed to demonstrate that a proven track record predicts success. You're killing me here!

Now, I almost convinced myself to go to your meeting in Omaha, just for the steak.

But if I can't rely on stock tips from a guy with $42 billion, should I really trust your restaurant recommendation?