Collection: Warren Buffett - #105 Investing 'Correlation Coefficient'

Updated: Apr 17


Video Link: https://youtu.be/YJc-zy0KboM

In this episode, Warren Buffett and Charlie Munger were asked on whether it is possible to show the correlation coefficient between Berkshire Hathaway and S&P 500 in the annual report.


In this episode, you’ll learn:

  • What is Warren Buffett comments on correlation coefficient.

  • Why only useful information is shown in Berkshire's annual report.

  • Why Warren Buffett doesn't think anything else except price and value.

To check out all Collection: Warren Buffett <click here>

[Transcript]

(Source: https://buffett.cnbc.com/video/1998/05/04/afternoon-session---1998-berkshire-hathaway-annual-meeting.html)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:09

Yvonne Edmonds (PH) from Cedar Mountain, North Carolina.


I have a specific question but not a trivial one. You regularly compare Berkshire Hathaway’s performance to the S&P 500, which is very helpful and very interesting. But I haven’t seen a correlation coefficient between the S&P 500 daily — from day-to-day — performance — to close, say — and Berkshire Hathaway’s close.


Now, it so happens for me — and I’m sure some other people in the audience — that I don’t always have access to newspapers — or the internet, for that matter — newspapers that publish Berkshire Hathaway performance on a daily basis, or even a weekly basis for that matter, or a monthly basis.


It would be very helpful to know the extent of a correlation coefficient between those two variables. If you have that, would you let us know what it is? And if you don’t, would you please consider calculating it in the future?


WARREN BUFFETT 01:28

Well, it could be calculated but I don’t think it would have much meaning. I mean, it would be an historical correlation coefficient which, you know, I would be very reluctant to have people place any weight in. I try to indicate even the limitations of the yearly comparison of the relative performance, because what was doable by us in the past is not doable today. I mentioned in my annual report, the best decade I ever had on comparative performance by far was the 50s.


Now, I don’t think it was because I was a lot smarter then — (laughs) — unwilling to accept that. But you know, I had some edge of — well, it’s probably 40-plus points per year. But I was working with it — that has no relevance to today whatsoever. It would be misleading to publish it or make calculations based on it.


So I think that you would find — I don’t know what you’d find on a specific correlation between Berkshire and the S&P. You’d find a lot of correlation — well, you might not find so much — you’d find it in intrinsic value between that and Coke, and a few stocks like that.


But I don’t really think that’s particularly useful information going forward. We have no objection, anybody wants to make the calculation. But it wouldn’t be something that would be of any utility to us, and if we don’t think it’s utility to us, we don’t want to put it out for shareholders as being of possible utility.


We do think that the S&P annual calculation has some meaning because it’s an alternative for people to invest. They don’t need us to buy the S&P. So unless, over time, we have some advantage over that, you know, what are we contributing? What value is added by our management?


So we think that that’s — people should hold us accountable even though we would prefer not to be. Because it is a tough comparison for us as a tax-paying entity against a non — pre-tax calculation on the S&P.


But we don’t pay any attention to beta or any of that sort of thing. It just doesn’t mean anything to us. We’re only interested in price and value. And that’s what we’re focusing on all the time, and any kind of market movements or anything don’t mean anything.


I don’t know what Berkshire is selling for today and it really makes no difference. You know, it just doesn’t make any difference. What does count is where it is 10 years from now. And I can’t tell you what it was selling for on May 4th, 1983, or May 4th, 1986, so I don’t care what it sells for on May 4th, 1998.


I do care, you know, where it is, in general, 10 years from now, and that’s where all the focus is. Charlie?


CHARLIE MUNGER 04:13

Yeah, we’re publishing data in the form where we would like it if we were the passive shareholder. And so you’re getting the data and you’re getting it on a time schedule based on what we would want if we were in your position. And we don’t think — and we don’t think the correlation coefficients would help us.


WARREN BUFFETT 04:40

We don’t think anything that relates either to volume, price action, relative strength, any of that sort of thing — and bear in mind, when I was in my teens I used to eat that stuff up. I mean, I was making calculations based on it all the time, and kept charts on it, even wrote an article or two on it.


But it just — it just has no place in the operation now.


CHARLIE MUNGER 05:05

One of the pleasant things about dealing with Warren all these years is he’s never talked about a correlation coefficient. (Laughter) If the correlation isn’t so extreme you can see it with the naked eye, he doesn’t compute it.


WARREN BUFFETT 05:22

OK, we’re going to go to zone 6 and I’m going to have a Dilly Bar, and Charlie has got one here, too. (Laughter and applause) These are terrific.

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