Buffet Cookie Company Case Study Solution

Hedge funds underperform the S&P 500 index for 7 years consecutively

The underperformance of hedge funds is not news – studies have time and again shown that active managers, in aggregate and over the long term, failed to beat the market after fees. According to Hedge Fund Research, this phenomenon applies broadly across all strategies, from event-driven hedge funds to macro hedge funds. This is further supported through the comparison shown in Figure 1, where the low-cost S&P 500 index outperformed the average performance of hedge funds globally.

Factors causing the underperformance of active asset managers

The underperformance could be attributed to a large array of factors. Some of these factors include:

• A low-return world in today’s

The key is not to replicate his value-investing strategy, but is to be different. The key reason why Buffet is successful is because he is different – when he first practiced value investing, the other investors around were chasing after the highest yielding stocks. Similarly, if one wants to be successful today, he or she has to be different from the rest of the investors. However, being different is difficult. It comes with much risk, similar to choosing between the career paths of high-risk entrepreneurship and well-trodden investment banking jobs. How then, could one be different in today’s investing landscape?

Implications of decades of wisdom from Warren Buffet – being different

There are two key implications from the insights above:

1) Be different – if one wants to have high returns, he or she has to be different. It is extremely difficult and risky to be different, but is almost a necessity if one desires high returns.

2) Be extremely disciplined – find a strategy that suits your investment style and stick to it. Just like how buffet strongly believed in value-investing in an environment where everyone else is chasing after high-yield stocks, one should be high disciplined in adhering to his or her investing strategy. A good strategy may not work well in all environments, but should deliver exceptional returns over the long-term.

Investing in today’s markets – plenty of choices to choose

Two categories will be elaborated here:

1) Smart-Beta ETFs

The fast-growing $2 trillion ETF industry is extremely exciting, with new products coming into the market almost every week. Smart beta ETF is a relatively-new form of ETF that has its components weighted by unique components, such as volatility, momentum, or even secondary technical metrics. This does not mean, however, that they are necessarily better – recent studies have shown that the average smart-beta ETF do not outperform the market significantly, if at all.

Nevertheless, they are still great considerations for one to include in their portfolio. For example there are two interesting smart-beta ETFs that were established over the past 4 months:

i) Ticker: SBIO

The ALPS Medical Breakthroughs ETF targets biotech and pharmaceutical companies with drugs in Stage II or Stage III clinical trials. Established on December 31 2014, the fund has delivered a return of +24.96% since then, as compared to the +20.82% return of the average performance of biotechnology firms (Ticker:IBB). ii) Ticker: