Buffett really wasn’t a great stock picker: Swedroe on investing

Larry Swedroe, considered one of the most highly regarded researchers in the market, believes Warren Buffett’s investment style is no longer working well.

He mentions the number of professional Wall Street firms and hedge funds now participating in the market.

“Warren Buffett was widely regarded as the greatest stock picker of all time. And what we’ve learned from academic research is that Warren Buffett was actually not a great stock picker at all,” Swedroe told CNBC’s “ETF Edge” this week. “What Warren Buffett’s ‘secret sauce’ was, he discovered 50, 60 years before all the academics what these factors were that allowed you to get extra returns.”

Swedroe indicated that index funds can help investors trying to emulate Buffett’s performance.

“[Investor] Cliff Asness and the team at AQR did some fantastic research and showed that the leverage that Buffett applied through his reinsurance company could be explained. If you had bought an index of stocks that had the same characteristics, you would have virtually matched Buffett’s returns,” Swedroe said. “Today, through ETFs or mutual funds, any investor can own the same types of stocks that Buffett bought through companies that apply this academic research – companies like Dimensional, AQR, Bridgeway, BlackRock, Alpha Architect and a few others.”

Swedroe is the author and co-author of nearly two dozen books, including “Enrich Your Future – The Keys to Successful Investing,” released in February.

In an email to CNBC, he called it “a collection of stories and analogies … that help investors understand how markets really work, how prices are determined, why it is so difficult to consistently outperform through active management.” [stock picking and market timing,] and how human nature leads us to make investing mistakes [and how to avoid them].”

During his ‘ETF Edge’ interview, Swedroe said investors can also benefit from momentum trading. He argues that market timing and stock selection often play no role in long-term success.

“The momentum is certainly a factor that has worked in the long term, although it also goes through some long stretches because everything else will underperform. But the momentum is working,” said Swedroe, who is also head of economic and financial research at Buckingham Wealth Partners. . “It’s purely systematic. Computers can do it, you don’t have to pay high fees and you can access it with cheap momentum.”

In his latest book, Swedroe compares the stock market with sports betting and active managers with bookmakers. He suggests that the more investors “play” – or invest – the more likely they are to underperform.

“Wall Street needs you to trade a lot so they can make a lot of money on the bid-ask spreads. Active managers make more money by making you believe they are likely to outperform,” Swedroe said. “It’s mathematically virtually impossible for that to happen, because they just have higher expenses, including higher taxes. They just need you to play, and so, you know, that’s why they tell you that active management is a winning game is.”

He sees active management becoming more efficient at attracting emotional investors – what he calls ‘dumb retail money’.

“[Emotional investors] are doing so bad [that] They underperform the funds they invest in because the stock selection is wrong and the market timing is wrong,” Swedroe said.