- Warren Buffett and George Soros have long been hailed as two of the world’s greatest investors, but their returns have lagged for years.
- Today, Nicholas Vardy offers an explanation.
It is said that two figures are carved into the Mount Rushmore of investing: Warren Buffett and George Soros.
Their investment styles could not be more different. However, the two greatest investors in history have several things in common…
Both Buffett and Soros turn 90 this August.
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Prior to the dot-com bust in 2000, both Soros and Buffett boasted enviable 30-30 track records: average annual returns of 30% over 30 years.
(This made them equivalent to a .400 hitter in baseball. That’s a feat last achieved by Ted Williams in 1941 when he hit .406 for the Boston Red Sox.)
Finally, both have had the poorest returns of their careers since the global financial crisis of 2008.
Buffett’s Berkshire Hathaway’s average annual returns have trailed the S&P 500 over the past 15 years.
Soros closed his Quantum Fund in 2011 to outside investors, opting for an “endowment” model of investing.
Why .400 Hitters in Baseball Disappeared
So the question arises…
Will any investor dominate the financial markets again the way Soros and Buffett did between the mid-1960s and the dot-com meltdown of 2000?
The short answer is no.
In his book Full House: The Spread of Excellence from Plato to Darwin, the late Harvard paleontologist Stephen Jay Gould examined a key question: Why hasn’t baseball produced a .400 hitter since Williams?
Gould explained it this way: The overall quality of performance in baseball has improved over time.
On the one hand, it became harder for batters to get on base. Pitchers mastered new pitches like the slider. Bigger gloves improved fielding. Managers employed new tactics.
On the other hand, batters become more athletic. They spent less time brawling in bars and more time pushing barbells. Some even popped steroids to up their game.
As each player ups the quality of his game, the top players in baseball perform closer to what is humanly possible.
This also means less room for variation at the extreme edges of the performance bell curve. That, in turn, made achieving outlier performances like a .400 batting average less likely.
As Gould puts it, the “truly superb cannot soar so far above the ordinary.”
… As Did Hedge Fund Managers Who Generate 30% Annual Returns
You can easily apply Gould’s argument to Soros’ and Buffett’s fading investment returns.
Their success inspired a new generation of ever-smarter money managers.
Investing has become far more competitive than when Soros and Buffett were in their prime.
Early in his career, Soros focused on mid-priced European securities when Wall Street ignored them. He described himself as a “one-eyed king among the blind.”
Today, tens of thousands of Soros wannabes have paged and parsed through the grand master’s classic The Alchemy of Finance: Reading the Mind of the Market.
Paul Tudor Jones, one of the original hedge fund greats, summed it up best in his foreword to Soros’ book.
Quoting George C. Scott from the movie Patton as the U.S. general looked out on the tank formations of his German nemesis, Tudor Jones jokingly warned Soros: “Rommel, you magnificent bastard! I read your book!”
Richard Dennis’ secretive “turtle trading” trend-following systems are now available for free on the internet.
No wonder the prospects for Soros wannabes look even bleaker.
Why 30-30 Investment Track Records (for Humans) Are a Thing of the Past
Savvy readers will point out that Renaissance Technologies’ flagship Medallion Fund has returned more than 39% annualized over 30 years from 1988 to 2018.
But here I am talking about human traders – not algorithms run by powerful computers (like those used in my Oxford Swing Trader service) that suck out every tidbit of pricing inefficiency in the market.
After all, we still have world chess champions even though we know a computer could beat them consistently.
Tens of thousands of small-time (human) traders can still crank out Soros-like 30%-per-year returns.
You can trade your way to huge returns with small accounts easier than ever before.
But it’s unlikely you can do it with $100 million, let alone $10 billion.
Gould did not exclude the statistical possibility that you could see another .400 hitter in baseball.
Nor could you ever exclude the possibility of another Soros or Buffett with a 30-30 track record.
Still, Gould would call that “a consummate rarity.”
And that’s not a bet I’d be willing to make.