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Value Is the Word From Buffett

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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The letter is out. It isn't quite as long as last year's 50th-anniversary special, but at 18,473 words it's still the second-longest Berkshire Hathaway shareholder letter since Warren Buffett started writing them in their current chatty form in 1978 (I'm referring to the letter for 1977, which was sent out on March 14, 1978).

What's in it? Well, here's what's in it:

source: wordle

Buffett's annual letters are pored over with such intensity by so many people that it can be hard to add much to the discussion. So I thought I'd try this year to look not so much at what Buffett said but at some of the words he has used. This isn't an entirely original thought: just this week, Bloomberg's Lily Katz charted some of the most-frequently recurring themes in Buffett's letters (top of the list: shameless plugs for Berkshire-owned insurer GEICO). What I wanted to know, though, was whether there were any words in Buffett's vocabulary that had predictive value.

Despite his nickname, the Oracle of Omaha generally avoids making predictions about the world. But what if he's been making them subliminally? I didn't want to do a pure data-mining exercise (well that, and I don't really know how to do a pure data-mining exercise), so I picked eight words that (1) showed up a lot in several letters that I sampled and (2) seemed like they could possibly offer some insight into the state of the world or of Buffett's thinking. The words I chose were: buy, sell, gain, loss, market, price, problem and value. Then my wife suggested I throw in "future."

Here's what the history looks like for the five of my words that appeared most frequently:

The word that really stands out here is "value." It peaks at interesting times: those big spikes in the 1980s and 1990s were both at or near the beginning of long bull markets. And sure enough, there is a moderate correlation between the frequency with which Buffett uses the word "value" in his letters and the performance of the Standard and Poor's 500 Index for the next several years. It's strongest for the next four years -- Excel churns out an r of 0.42 (where 1 means perfect correlation, zero none at all and anything above 0.5 usually counts as a strong correlation).

To put it another way, "value" constitutes 0.32 percent of the words Buffett has used in his annual letters since 1977. In years when he uses it more frequently than that, the average gain in the S&P 500 during the next four years is 61 percent. In years when he uses it less frequently than that, it's 34 percent. In the letter released today, the share is 0.30 percent -- just barely below average. I will leave you to make your investing decisions accordingly.

OK, so it's a silly little factoid. But none of the other words I tested (or combinations of words, such as buy minus sell) showed any significant correlation at all. The strongest one I found for any of the other words was between "market" and the S&P 500's performance for the next five years, with an r of just 0.12.

I did find one truly strong correlation in the data -- with an r of 0.70, no less. That was the link between the total number of words in a shareholder letter and the closing price of the S&P 500 at the end of the year covered by the letter. There's also a pretty strong correlation between the word count and the S&P 500 at the end of the next year. Even looking at the S&P four years later the r is still an impressive 0.62. Which surely tells us something about the limits of exercises such as this.

  1. I'm measuring from the end of the year that the letter covers; for today's letter I would use the S&P 500 closing price on Dec. 31, 2015.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at

To contact the editor responsible for this story:
James Greiff at