Before diving in, let’s acknowledge a significant figure in the investment world. Many admire Warren Buffett, not just for his unparalleled success as an investor, but also for his unwavering integrity, profound wisdom, and disarming wit. His dedication and graceful approach to investing are truly inspiring. Therefore, what follows is not a critique of Mr. Buffett himself, but rather an observation on the ever-evolving dynamics of the investment landscape.
It might come as a surprise, but Berkshire Hathaway, under Warren Buffett’s esteemed leadership, has actually underperformed the broader stock market over the past two decades. This raises important questions for investors, especially when considering long-term strategies and comparing different investment vehicles, including individual stocks like NYSE:T, against market benchmarks.
Seriously?
Yes, seriously.
Consider this data from Warren Buffett’s 2022 letter to Berkshire shareholders, illustrating the annual returns of Berkshire stock versus the S&P 500 since 1965.
Focus on the last two lines of this table. Since 1965, spanning 58 years, the S&P 500, including dividends, achieved a compounded annual gain of 9.9%. In contrast, Berkshire stock delivered an impressive 19.8%.
While this might seem like a modest difference, the cumulative effect is staggering. The overall gain for the S&P 500 during this period reached 24,708%, whereas Berkshire stock soared to a remarkable 3,787,464%.
Incredible, isn’t it? It’s understandable to immediately think, “I need to invest in Berkshire Hathaway right away!” The historical performance is undeniably compelling.
However, it’s crucial to consider our current investment horizon. We aren’t starting in 1965 with a 58-year outlook. Most investors today are looking at investment periods of perhaps 10, 20, or 30 years, starting now, in the present market conditions.
To gain a clearer picture of more recent performance, let’s examine how Berkshire has fared against the S&P 500 over various 10-year intervals. This perspective is vital when making investment decisions in today’s market, and even when we consider comparing individual stock performance, such as NYSE:T, to broader market trends.
The 10Y-BRK column represents Berkshire’s 10-year compounded annual returns, and 10Y-SPX shows the same for the S&P 500. The “Difference” column is key, highlighting Berkshire’s outperformance (or underperformance) relative to the S&P 500.
These results might challenge preconceived notions. One might expect consistent outperformance from Berkshire, indicated by a predominantly green “Difference” column. However, the data reveals a different story. The green, signifying Berkshire’s outperformance, is concentrated in the earlier periods. Gradually, the column shifts to yellow and then, starting around 2003, becomes consistently red, indicating underperformance.
Calculations reveal that from 1965 to 2002 (38 years), the S&P 500’s compounded annual return was 10.02%, while Berkshire’s was a significantly higher 25.66%. This period solidified Berkshire’s legendary status.
However, from 2003 to 2022 (20 years), the landscape shifted. The S&P 500 delivered a 9.80% compounded annual return, while Berkshire lagged slightly behind at 9.75%. This subtle underperformance over two decades raises important considerations for investors.
If even a legendary investor like Warren Buffett hasn’t consistently outperformed the S&P 500 in recent decades, what does this imply for the average investor striving for market-beating returns?
Despite these realities, the pursuit of outperformance persists. Investors often chase investments with recent high returns, only to be disappointed when those trends inevitably shift. This cycle involves transaction costs, management fees, and taxes, not to mention the psychological toll of constant portfolio adjustments and uncertainty, often resulting in returns that fail to even match average market performance.
The data consistently shows that a significant majority of professional investment managers, let alone individual investors, underperform the market, even within short timeframes like a year. And this underperformance tends to worsen over longer investment horizons.
S&P Global publishes an annual report (SPIVA) comparing actively managed funds against S&P indices. Year after year, these reports demonstrate the consistent underperformance of active managers relative to benchmark indices.
In their 2022 US SPIVA report, it was revealed that a staggering 93.40% of actively managed large-cap US funds underperformed the S&P 500 over a 15-year period. This statistic is a powerful reminder of the challenges inherent in active investment management.
Considering this broader context, Berkshire Hathaway’s slight underperformance against the S&P 500 over 20 years should be viewed as a testament to the quality of Warren Buffett’s investment management. Slightly lagging the index is arguably a better outcome than the vast majority of active managers achieve.
Will Berkshire outperform the S&P 500 in the next 20 years? Or will the underperformance continue? The truth is, no one knows for sure, and it’s unlikely even Buffett himself would offer a definitive prediction. Similarly, predicting the future performance of individual stocks like NYSE:T with certainty is equally challenging.
So, what is a prudent alternative to this often-disappointing chase for outperformance?
The answer lies in index funds.
Low-cost index funds, by their very nature, won’t outperform the market. They might not be the subject of exciting investment conversations. However, they offer a high probability of delivering superior long-term returns compared to most active investment strategies, whether managed individually or through funds.
While the allure of picking a market-beating investment exists, is it a gamble worth taking with your life savings? Furthermore, investing in index funds provides an additional benefit: it mitigates the constant worry of underperforming the market and eliminates the need for frequent portfolio adjustments.
The fact that even the “Oracle of Omaha,” Warren Buffett, has not consistently outperformed a simple broad market index over two decades should prompt introspection. It encourages us to question our own ability to achieve consistent outperformance over the long term. Recognizing our limitations and embracing humility in the face of the financial market’s inherent complexities and uncertainties might be the key to becoming more effective, long-term investors. When we “nyse:t compare” different investment paths, the simplicity and effectiveness of index funds become increasingly compelling.
