Value investors are thinking about lives well lived this week. They're looking forward to reading what Warren Buffett and Charlie Munger have to say about Berkshire Hathaway's next 50 years. At the same time, they're celebrating the life of Irving Kahn who gave Methuselah a run for his money.
If you want to make your financial planner sweat, tell them you're likely to live as along as money manager Irving Kahn because he passed away this week at the ripe old age of 109. As you might imagine, retirement can be an expensive proposition for those who live past the century mark.
But it is much easier for people, like Mr. Kahn, who just keep on working. Mr. Kahn's work ethic was remarkable because he continued to look for bargains in the stock market at Kahn Brothers Group – albeit at a slower pace – until very near the end of his life. He was giving interviews and talking about value stocks just last summer.
Mr. Kahn first went to work on Wall Street in 1928 where he made money shorting stocks just before the great crash of 1929. Later on, he helped Benjamin Graham with his class, as a teaching assistant, and lent the famous money manager a hand with his book The Intelligent Investor.
Mr. Kahn was a devotee of Mr. Graham's value investing philosophy and, to the end of his days, loved to buy cheap out-of-favour stocks.
As it happens, Warren Buffett, Mr. Graham's most famous student, is celebrating a different sort of milestone. This year marks his 50th anniversary at the helm of Berkshire Hathaway.
As a bonus for shareholders, he will reveal his vision for the firm's next 50 years in this year's annual report, which is due to be published this weekend. In addition, his long-time sidekick – and renowned investor in his own right – Charlie Munger will independently present his own views on the company.
As a Berkshire Hathaway shareholder, I look forward to their reports and hope that both men will continue to be productive for a long time to come. But I doubt the stock will be as good an investment as it has been over the decades.
After all, the company will eventually be deprived of Warren Buffett's genius and it is already too big for its own good. After decades of growth, Berkshire Hathaway is now one of the largest stocks in the U.S. and, generally speaking, the largest companies in the land tend to underperform.
Money manager Robert Arnott and financial researcher Lillian Wu recently studied the returns of giant stocks from 1952 to 2011 and the results weren't encouraging. For instance, if you had invested in the largest stock in the U.S., you would have underperformed an equally weighted index of stocks by 3.7 percentage points a year on average over the following decade.
Optimistically, Berkshire Hathaway might go on to thrive for decades to come. On the other hand, it might decline and, as with all too many conglomerates in the past, wind up being carved into bits and devoured by other companies.
I'm also reminded of the $1-million bet Mr. Buffett made in 2008. He wagered that a low-cost S&P 500 index fund would beat a collection of hedge funds over the next 10 years. Seven years in and the index fund is winning by a large margin.
In a similar way, I'd bet – albeit it a much smaller way – that a low-cost index fund will beat an investment in Berkshire Hathaway's stock over the next 50 years.
After all, last year Mr. Buffett advised his heirs to put 10 per cent of their inheritance into short-term government bonds and 90 per cent into a very low-cost S&P 500 index fund. It seems only fair to apply Mr. Buffett's own advice to his company's stock.
But, no matter what the future might bring, investors would do well to learn from Messrs. Buffett, Munger, and Kahn.