Why Warren Buffett can't make money any more

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Niccolo and Donkey
Why Warren Buffett can't make money any more

Telegraph UK

James Bartholomew

March 18, 2011


Spare a sympathetic thought for Warren Buffett. You may think the investment manager does not need a great deal of commiseration having made himself one of the richest men on the planet and enjoying the adulation of fans. However, nobody's life is perfect. Even Warren Buffett has at least one painful circumstance to endure.

In his admirably frank words, "The huge sums of capital we currently manage eliminate any chance of exceptional performance." That might sound dry and technical. But to those of us who relish competing in the portfolio investment game, this is obviously a cry of pain, a moan of misery.

Mr Buffett, whose pleasure, fame and fortune have all been based on outperforming the stock market by a wide margin, is admitting he can't do it any more. He has too much money under management. He can't beat the market because he cannot easily move in and out of investments. He cannot buy into small companies at all. So those of us with smaller pots of money to play with should enjoy our advantage over Mr Buffett. We can still duck and dive, get in and out.

Unfortunately I have not done very much of this recently. I have been sitting on the same shares for quite a while. They have done well. But finally I have stirred myself. I know I ought to try to ''rotate'' from time to time into some new purchases that are undervalued and where I can, again, benefit from a re-rating. So what have I bought?

My first idea came from a fund manager friend who was complaining that many people were talking nonsense about which shares to buy now. They were saying you ought to buy into good-quality companies. "On the contrary," he said, "you should be buying rubbish."

I think he is right. The biggest gains will be in companies regarded as basket cases sometime in the past few years but which, over the next year, will come to seem not so risky after all.

I have several ''rubbish'' companies in my portfolio. The one he mentioned was Lloyds Bank. The shares have been under the weather. They have spent the past two years languishing between 47p and 75p. I have bought at 68.6p and 67.6p, since when the shares have fallen to 62p. At that price they stand at 7.2 times forecast earnings per share in 2012. That ratio is pretty low for a bank. I am hoping for a significant re-rating.

My second purchase has also been in the financial sector because this is where good value seems to be at the moment. I have bought into an insurance underwriter called Catlin. Its shares are quite a way below the highs of 2007 yet the business has continued to grow and profits have recovered. The shares, at the price I bought, 372.7p, stand at only seven times the forecast earnings for the current year. There is also a pretty reliable-looking forecast dividend yield of just under 7pc.

My third purchase is also in insurance. Randall and Quilter has a number of activities, including buying other insurance companies to ''run off'' their business. This company is on an attractive valuation. At 102.5p, the price I paid this week, it is on nine times forecast earnings for this year. It also has a big forecast yield of 7.8pc. The clincher is the interim statement, an attractive mix of ambition, carefulness about possible difficulties and attention to detail.

Finally, I bought into First Property Group, which owns commercial property in Poland and manages property for others. I have wanted to increase my investment in property in Eastern Europe after the financial crisis. This company has one property that yields 8pc. That makes me believe there is scope for a re-rating here too as well as rental growth.

I don't know if Warren Buffett would like a piece of the action but, if so, it is unfortunate for the great man. He's just got too much money.

He has simply grown to the scale of some investment funds or larger corporations. 'Having more money than I can possibly find reasonable investments for in finite time, using my personal capabilities' is on my short list of personal problems I really ought to have, one day.

Cue the small violin section. And re-read Ecclesiastes .