If you have not noticed, Warren Buffett has “underperformed” S&P 500 index in 2011. Buffett’s Berkshire Hathaway slipped 4.7% in 2011, while the Standard & Poor’s 500 index ended essentially unchanged.

What would you have done to outperform Warren Buffett in 2011? Simple, Hold Cash!

This reminds me of an interesting story. Recently, I was doing an investment portfolio review for one of my clients. His portfolio was down 4% in 2011 (wow, it outperformed Warren Buffett!), and he did not seem to be very happy because it was still negative. So I asked him, “what would you have done if I did not manage your portfolio and you were investing on your own”. His reply surprised me,

I would have held cash and I would not have lost money!

When I recalled his investment risk profile, he indicated that he was balanced and could accept fluctuations with a modest return. I also remember that when his portfolio has made some profit in 2010, he came to me to request some top-up.

This incident, like some other similar cases, happened in the past few months when the investment market was in chaos. I cannot help thinking that by holding cash in 2011, did you really outperform Warren Buffett?

In Aug 2011, I posted a chart of typical DIY investor behaviour as below.

Most of the investors will just hold cash at the worst possible time when the market is at the bottom. Straits Times Index has gone up more than 6% year to date. If I were to hold cash for the client, would they ever have these gains?

Many may have forgotten that in 2010, shares of Warren Buffett’s Berkshire Hathaway (Class A) have finished the year with a gain of 21.4%, far outperforming the benchmark S&P’s 12.8% gain.

Can any investor make money from the market by not investing?