Even a subpar Sage is pure genius - By John Kay

Berkshire owns a number of insurance companies, which are strongly cash-generative, since the nature of insurance is that the payment of premiums precedes the payment of claims. These funds, and Berkshire’s retained earnings, are invested in a portfolio of wholly owned businesses and large holdings in some listed companies. The distinguishing characteristic of all these businesses is that they have sustainable competitive advantages: market positions competitors would find it difficult or impossible to reproduce. There is little portfolio turnover. The preferred holding period for stocks is, Mr Buffett has often said, forever.

If he is a genius, it is the genius of simplicity. No special or original insight is needed to reach his appreciation of the nature of business success. Nor is it difficult to recognise that companies such as American Express, Coca-Cola, IBM, Wells Fargo, and most recently Heinz – Berkshire’s largest holdings – meet his criteria.

Which leads back to the question of why Berkshire has so few imitators. After all, another crucial insight of business economics is that profitable strategies that can be replicated are imitated until returns from them are driven down to normal levels. Why do the majority of investment managers hold many more stocks, roll them over far more often, engage in far more complex transactions – and derive less consistent and profitable results?

Partly the problem is the trap of short-term relative performance measurements – the distortion of perspective that allows a 14.4 per cent gain to be described as subpar performance.

But the deeper issue is that complexity is intrinsic to the product many money managers sell. How can you justify high fees except by reference to frequent activity, unique insights and arcana? But Mr Buffett understands the limitations of his knowledge. That appreciation distinguishes people who are very clever from those who only think they are.