How AI Can Help You Outperform Warren Buffett’s Portfolio

This article is written by Hao Liu, Financial Analyst at I Know First.

(Source: Reuters)

“I am nervous that he (Warren Buffett) may have missed this whole rally…A lot of retail investors were ploughing money into the market and doing better than professional investors. I think you can include Buffett in that.”

— James Shanahan, an analyst with Edward Jones

Summary

  • Value stocks along with Warren Buffett’s portfolio have been underperforming the broader market over the past decade, the pandemic only worsens the situation.
  • Despite all the doubts, there are still many investors follow Warren Buffet’s portfolio, and AI can help them follow the portfolio more efficiently. 
  • AI can help investors achieve outstanding results by improving their valuation accuracy and identifying opportunities in high-growth stocks.
  • Don’t blindly follow Warren Buffett’s portfolio, follow his ideas instead. And with the help of AI, you may achieve outstanding results.

This article will firstly introduce and discuss value investing, along with Warren Buffett’s past performance under this investing strategy. And then it takes a look at how technology (AI stock forecasts) can boost the performance of value-based portfolio, especially during this unpredictable time. If you’re a follower of Warren Buffett’s portfolio, you may find possibilities to make more informed decisions and even outperform Warren Buffett’s by combining value investing and the assistance of technology.

What Is Value Investing?

Value investing is known as the investing strategy that makes Warren Buffett one of the richest people in the world. According to Investopedia, this strategy aims to maximize returns by seeking stocks that trade at a market price less than their intrinsic value, which is the investor’s perception of how much an asset (e.g., company, stock) is worth. To derive the intrinsic value, value investors will use valuation methods like discounted cash flow (DCF) model.

(Source: Texas Lutheran University)

As we can see in the chart above, the difference between market price and intrinsic value is called margin of safety. And value investors want to buy the stock when there is a significant margin of safety.

Value Stocks Have Been Underperforming in Past Decade

It seems that over the past decade, the strategy that once worked perfectly didn’t deliver many positive results. As shown in the graphs below, what Warren Buffett thinks highly of as value stocks have been performing poorly against the wider market, and the pandemic has only worsened the situation.

During this pandemic, many inexperienced retail investors have benefited more than those professionals. Especially after last month the billionaire investor Warren Buffett admitted making a mistake with his airline holdings, whether value investing still works in today’s market environment has become a controversial topic among investors. Some directly calls value investing “a religion than a rational approach” and believes it makes no sense to keep faith with value investing nowadays, while others holds a different view.

Has Warren Buffett Lost His Touch?

Following Buffett’s misjudge about airline stocks and Berkshire’s loss of inventors, question has been raised whether Warren Buffett, the Oracle of Omaha, has lost his touch.

As we can see in the chart above, over time Berkshire’s performance no longer prevails over the broader market as before. In fact, 2019 witnessed Berkshire’s worst performance in a decade as the conglomerate fell behind the S&P 500 by 20%. And with a nearly $50bn reported loss in the first quarter, this year does not seem to show any signs of a turnaround.

So, what happened to Warren Buffett’s holdings over the past two years? Last month we all heard about Buffett’s questionable move of holding and selling airlines at the wrong time, which caused him great loss. However, this doesn’t seem to be his only “mistake” in recent years. Buffett’s $10bn investment in oil producer Occidental Petroleum has been hammered by the oil price slump. Before the pandemic hit, Buffett has also suffered from consumer goods company Kraft Heinz’s $3bn equity write-down last year.

As much as people are disappointed by these last few unsatisfactory investments he made, it seems that Buffett’s absence in the investment world is more of a disappointment. As shown in the chart above, Berkshire’s cash is piling up over the past decade, with the most recent reported cash amount hit $137bn record high. As a response to people’s question about this huge cash pile, Buffett claimed that he haven’t seen anything “that attractive”. But we did see that Buffett has missed the whole rally in March and April.

How AI Can Help Value Believers Follow Warren Buffett’s Portfolio More Efficiently

(Source: Reuters)

Despite all the doubt on Warren Buffett, there are still many value believers who follow his portfolio (13F filing), maybe including you too. However, you may have already realized blindly following his portfolio is unlikely to get you anywhere far. There are two obvious reasons. For one, there exists a 45-day delay of 13F filing after the transactions take place. Berkshire is permitted to keep its stakes confidential before its completely built up. So, by the time you see the portfolio in the published filing, it would be too late to trade at the same price as Warren Buffett did. For another, Warren Buffett is simply not always right. One recent example is his holdings of airline companies as we mentioned above. 

Nevertheless, what if I tell you AI can help you overcome above difficulties to follow Warren Buffett’s portfolio more efficiently? I Know First also has a Warren Buffett Portfolio Package that provides forecasts on his current holdings according to 13F filing. In each portfolio forecast, 20 stocks consisting of top 10 bullish and bearish positions are identified by AI algorithm. The forecast has a length of 14 days and updates on a daily basis. This allows investors to guess potential changes in Warren Buffett’s portfolio holdings and make in-time adjustments over time. By the time 13F gets published, investors can verify their adjustments with Warren Buffett’s. This is a more proactive and efficient way to follow Warren Buffett’s portfolio.

AI Can Even Help You Outperform Warren Buffett’s Portfolio

(Source: Yahoo Finance)

On the one hand, AI assists value investing by improving the accuracy of valuation models. Firstly, AI is more quickly and accurate as it aggregates all information. A reasonable model assumption requires a comprehensive consideration of all the relative information. This means investors need to regularly read the news and check the prices. Machines, on the other hand, which automatically collects all the real-time information without omission, is more capable of delivering a comprehensive, on-time result.

Also, AI is more objective because it’s based on statistics rather than subjective judgement. On top of a good collection of the information, the investor needs to interpret the information into quantitative terms objectively. Being objective has always been one of the hardest things for human being. Especially in the investment world, disruptive information and investment sentiment can easily affect one’s objectiveness. With a more accurate and objective forecast, investors can derive better assumptions to build a more accurate valuation model. Additionally, AI’s incredible analysis speed allows investors to react to price changes more promptly. 

On the other hand, AI helps identify opportunities in the growth market, for which value investing has a blind spot. This is mainly because traditional value measures are obsolete in evaluating dominant market positioning of many new technology companies. As a value investor, Warren Buffett has always been avoiding big tech companies. Although in recent years he regretted not investing in Amazon and Google when he could, the current high valuations of these tech giants still prevent Warren Buffett from further investing in them. But as we can see in the graph below, the tech giants almost add up to a quarter of S&P 500. Insufficient holdings in these companies will make Berkshire difficult to catch up with the broader market, let alone outperform the market. Just as Christopher Rossbach (chief investment officer of J Stern & Co. and a longtime Berkshire shareholder) pointed out, “If Berkshire is to have the prospects of generating the value it has in the past, it has to adapt by buying these companies that will generate significant value over the next 25 years.”

However, as AI is not restricted to price-to-book ratio or any other traditional value measures, it can go beyond the corporate financial statements. Particularly, it collects all the information related to intangible assets like intellectual property and brand value that greatly contribute to the market positioning of fast-growing companies, this can bring different insights to human on the high growth stocks, just like Apple, Google, Amazon and Netflix in the past two decades.

How I Know First AI Can Help You Outperform

(Source: I Know First)

First and foremost, I Know First AI forecast is not trying to make the decision for you, but we offer choices for you. We’re not giving you just one best/worst stock. Instead, we offer top 10 stocks covering various sectors so that you can choose the optimal ones based on your own risk preference and portfolio size. Among our widely covered forecast subjects, investors can pick the best performance stocks in different sectors to achieve diversification. For investors with a smaller size portfolio, we also offer best stock under $5$10$20 and $50. For risk-averse investors, we have conservative stocks forecast package, while for risk-lovers, we also have aggressive stocks forecast package. For value investors, the tech stock forecast can be particularly useful because it supplements for value investing’s blind spot in high-growth market. Likewise, our small cap forecast also supplements for Warren Buffett’s portfolio since it only contains big cap stocks.

Secondly, with quantitative signal, we’re not simply telling you the trend is bullish or bearish. The value of the signal gives a sense of how bullish or bearish the trend is, and it also allows you to compare the relative trend with other stocks. This can be particularly useful for those retail investors with limited amount of money but want to achieve diversification at the same time. Their portfolios are likely to consist of only one stock in each sector. AI can help them choose the optimal one to maximize total return. Take healthcare industry as an example, which has become very popular since the pandemic. In I Know First Jan 12th healthcare forecast, as you can see below, the majority of healthcare stocks are bullish. But LJPC’s signal figure is much higher than others, indicating a stronger bullish trend. The investor may consider replacing his current holding of other healthcare stocks with LJPC to maximize his total return. The forecast was also proved to be true one month later with a 39.83% growth that was significantly higher than most of the others.

(Source: I Know First)

Moreover, knowing how big the trend is also helps you adjust your assumption figures. For instance, a strong bullish signal may make you rethink if you’re too conservative about certain assumptions.

Thirdly, I Know First AI Algorithm gives forecasts on different timespans, varying from very short term (3 days, 7 days, 14 days), to midterm (1 month, 3 month) and long term (1 year). This gives insights to both short-term and long-term investors. They can use I Know First forecast to verify their assumptions in valuation models. If they find the forecast supports their assumptions, it’s good to have confirmation. If the forecast shows different trends, they may want to check if they’ve missed some information.

To sum up, I Know First AI serves like your intelligent investment manager who gives you alternative opinion on your investment decision. This proves to be particularly valuable in an unpredictable time like these days. Last month, as Warren Buffett suffered great loss from his false bet on the airline market, I Know First clients all benefited from a series of successful forecast on the bullish outlook for airline stocks (see table below). 

(Source: I Know First)

Exactly two weeks before the surge of airline stocks, I Know First AI identified UAL and LUV among the top 10 stock market opportunities. Moreover, the shorter-term 7-day forecast on these two airline companies gave even stronger bullish signals before the airline stocks actually surged. So, when everyone was talking about the big jump of airlines stocks, I Know First was not surprised. AI already informed us what would happen next.

Conclusion

It seems that time has lost all meaning these days. The value investing strategy that once works perfectly has been underperforming the market for more than a decade. Berkshire Hathaway’s poor performance since COVID-19 has raised more questions on Warren Buffett and value investing. Even so, there are still many value investors refer to Warren Buffett’s portfolio. AI can help these investors follow the portfolio more efficiently. Moreover, AI can even help investors outperform Warren Buffett’s portfolio. For one, AI provides more accurate and objective indications for valuation. For another, AI supplements value investing by identifying opportunities in high-growth stocks such as tech startups.

All in all, don’t blindly follow Warren Buffett’s portfolio or just mimic his moves. Instead, follow his ideas. And with the help of AI, you may achieve outstanding results. 

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Please note-for trading decisions use the most recent forecast.