Afterword 203demonstrate that what Buffett had taught and what I had written, if
followed, would allow an investor to generate market-beating returns.
The proof would be in the performance.
The new fund was established on April 17, 1995. Armed with the
knowledge gained by having studied Warren Buffett for over ten years,
coupled with the experience of managing portfolios for seven of those
years, I felt we were in a great position to help our clients achieve
above-average results. Instead, what we got was two very mediocre
years of investment performance.
What happened?
As I analyzed the portfolio and the stock market during this pe-
riod, I discovered two important but separate explanations. First, when
I started the fund, I populated the portfolio mostly with Berkshire
Hathaway-type stocks: newspapers, beverage companies, other con-
sumer nondurable businesses, and selected f inancial service companies.
I even bought shares of Berkshire Hathaway.
Because my fund was a laboratory example of Buffett’s teachings,
perhaps it was not surprising that many of the stocks in the portfolio
were stocks Buffett himself had purchased. But the difference between
Buffett’s stocks in the 1980s and those same stocks in 1997 was
striking. Many of the companies that had consistently grown owner
earnings at a double-digit rate in the 1980s were slowing to a high single-
digit rate in the late 1990s. In addition, the stock prices of these com-
panies had steadily risen over the decade and so the discount to intrinsic
value was smaller compared with the earlier period. When the econom-
ics of your business slow and the discount to intrinsic value narrows, the
future opportunity for outsized investment returns diminishes.
If the f irst factor was lack of high growth level inside the portfolio,
the second factor was what happening outside the portfolio. At the
same time that the economics of the businesses in the fund were
slowing, the economics of certain technology companies—telecommu-
nications, software, and Internet service providers—were sharply ac-
celerating. Because these new industries were taking a larger share of
the market capitalization of the Standard & Poor’s 500 Index, the stock
market itself was rising at a faster clip. What I soon discovered was that
the economics of what I owned in the fund were no match for the
newer, more powerful technology-based companies then revving up in
the stock market.