Warren Buffett’s Biggest Losses

Carlos Lontro
May 13, 2018 · 4 min read

Hi everyone,

The other week a few customers would ask me how much profits I did on that day and how much I could make for them. Most of them would tell me that they are looking for 10 to 20% return per month. Every investment carries risk and I would ask them about their potential drawdown. Most of them could tolerate a 35% drawdown. I followed asking about the duration of the drawdown. They would like to see positive results within 3 to 4 weeks. I had even one customer that would not wish to see a drawdown above 2%.

At this point it is clear that they have the wrong mindset and filtered out reality from facebook fiction. To fill this gasp in knowledge they should look at Warren Buffett’s Stock Berkshire Hathaway. As traders and investors, we all admire Warren Buffett’s trading results, and many strive to achieve his performance. However, how many of us have carefully examined Warren Buffet’s trading results? Can you answer the following three multiple choice questions?

1. What is the compound monthly return of Berkshire Hathaway stock?
A) 1.54% B) 5.2% C) 10.8% D) 23%

2. What is the worst drawdown magnitude of Warren Buffett’s performance?
A) 80% loss B) 60% loss C) 44.3% loss D) 25% loss

3. What is the longest drawdown duration of Warren Buffett?
A) 4 weeks B) 6 months C) 3.3 years D) 10 years

Sadly, even Warren Buffet’s trading performance can’t meet their standards.

When you hear about the average long-term gains of 9–10% you must remember that those returns contain every single type of market environment. That means high valuations, low valuations, high interest rates, low interest rates, high inflation, low inflation, bubbles, recessions, booms, busts and everything in-between.

It’s an all-inclusive number that contains the good and the bad.

“Berkshire Hathaway (BRK) has gone down 50% three times in the past (or maybe more). Once in the early 1970’s, once in 1999 and then again during the recent crisis.
Of all the investors who owned BRK in 1970, how many have done better than the 20% or so return of the stock over the years by getting in and out of it in order to avoid the 50% drawdowns? There may be some who were able to improve on that buy and hold. But I doubt that there are too many people, even if they used very good valuation methods to time the sales and repurchases.”

Roughly every 6–7 years, Buffett’s investment vehicle suffered a rather large crash in its stock price. Yet since 1980 the stock compounded at a rate of 21% per year, good enough to double your money every three-and-a-half years.

Any example involving Buffett is a bit extreme, but it shows that earning higher returns come with a price. And these losses are very similar in magnitude with what you can expect from the overall market at times. The same is true of any investment that offers the potential for larger long-term gains.

Investors are constantly asking themselves, “How can I improve my investment performance?”

This is a worthy objective when it entails improving your behavior or process.

But what most people should be asking is, “How can I not do any worse?”

Can you create much better results than a buy and hold strategy? Yes, of course. It’s very possible but not necessarily easy (mostly because of psychological reasons).

But can you do much worse than buy and hold?

Definitely. And it’s very easy.

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Quotes /credits/mentions:

Hi, I’m Carlos. A Popular Investor @eToro -> ESIRInvestors; and Asset Manager & administrator of ESIR Investors Community on FB.

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