Swimming with Sharks: Can Small Investors Compete with Buffett?

Swimming with Sharks: Can Small Investors Compete with Buffett? Pankaj Topiwala. FastVDO LLC, 3097 Cortona Dr., Melbourne, FL 32940 Abstract: Millions of small investors fare poorly in the financial markets. For them, the markets are like turbulent seas. Braving them in a mere skiff, a major storm can spell financial doom at any time. But the reality is that most investment funds also underperform the market. Against this backdrop, there are some savvy investors who have consistently beat the market, for decades! Names such Benjamin Graham, John Templeton, Peter Lynch, or Jim Simons come to mind. But no investor has beat the market as decisively or for as long as Warren Buffett, getting an annual return of nearly 20% since 1965! Is there a way that the small investor can swim with these sharks? These legendary investors developed a refined sense for valuing companies through fundamental analysis (hard work), investing in solid companies that are deep in value. The untrained small investor cannot hope to replicate their method. To enter these waters, she needs a new boat: algorithmic trading. Not the kind that trades in microseconds (high frequency trading), which is again out of her reach, but the type that trades only a few times a year (very low frequency). Using an approach developed and tested in previous papers, we go head-to-head with Buffett's famous BRK-A fund and compare performance over the 44-year period 1980-2024. Buffett's BRK-A earned 19% annual return over the 44 years. We also test a 50-year period, the historical limit for Nasdaq. By using simple algorithmic trading methods, we show that the small investor can indeed keep pace with Buffett, without the hard work. Our simple methods allow us to obtain both strong gains, and reduced drawdowns, helping us to survive the major market downturns known as Black Swan events. This win-win is good news for small investors worldwide.