Warren Buffett Has Underperformed the Stock Market for the Last 20 Years
linkedin.comAs a huge fan of Buffett, I must point to the fact that can materially change this comparison in the years to come:
- stock market returns were abnormally high for the past 15 years
- Berkshire is sitting on a huge pile of cash, ready to invest
This is a very similar scenario to what people were saying in 1999 - Buffett is done etc. I highly recommend reading his biography - "The Snowball" and especially the preface when they describe the speech he gave in 1999, about stock market levels and valuations. Mind blowing, knowing what happened later.
> As a huge fan of Buffett, I must point to the fact that can materially change this comparison in the years to come:
The beauty of financial 'journalism'. They choose arbitrary points of comparison to fit whatever they are trying to 'sell'. Wonder why 20 years and not the past 21 years or 25 years or 30 years?
> - stock market returns were abnormally high for the past 15 years
Which was expected since we had QE and low rates for much of the past 15 years.
> Mind blowing, knowing what happened later.
Sure. He also said everyone should buy when the markets were collapsing in 2008 ( aka when there is blood on the streets ). And that was great advice as well. But Buffet's problem is that he discounts tech. He famously chose not to invest in microsoft because he didn't understand software and technology.
Buffett has a huge investment in apple. The tech comment is outdated
Despite that he is still underinvested in tech looking at how big a portion tech is now of the S&P 500. Mostly because he does not understand it if he did according to his own rules he would have even larger investments in tech.
Apple stock currently represents nearly 40% of Berkshire Hathaway's equity holdings.
> Mostly because he does not understand it (...)
What leads you to believe that he doesn't understand it? I mean, how many tech companies failed/are failing badly?
It's easy to single out Microsoft as an example of a success story, but it's even easier to pick failure stories. Perhaps Warren Buffet does well smelling out those?
> What leads you to believe that he doesn't understand it?
People dont understand the subtle art of language.
I, on the other hand, have always assumed that Buffett made the "I don't understand" remark with typical self-deprecating-but-knowing Buffett charm — as in, "All you people piling into dot-com stocks must be much smarter than I am, because I just don't get it!"
In other words, I believe that, in typical Buffett fashion, Buffett understood everything he needed to understand about technology in the late 1990s, which is that technology investors had gone stark raving mad.
https://www.businessinsider.com/why-buffett-doesnt-invest-in...
these are his own words from a few years back I did not make them up . He said as he did not understand he missed out on some good investments
> these are his own words from a few years back I did not make them up .
I'm sorry, but that's simply a gross misrepresentation of facts. If you read Warren Buffett's actual comment, it's quite clear that they were about the overall dotcom fever and how the bulk of these companies were objectively not a good investment. If course those who stood to benefit from the dotcom bubble were quick to attack Buffett to discredit him.
https://www.businessinsider.com/why-buffett-doesnt-invest-in...
Nothing to sell. Just making the point that active investing is hard.
I’m not sure either of statements really excuses the underperformance.
You either beat the market or you don’t. It’s relative. He could lose money but if he loses less than the broad market, he outperformed.
And sitting on a pile of cash is a negative, a lost opportunity.
That said 20 years is arbitrary, however it’s not an insignificant period of time. It’s two decades!
But my final point is that Buffet isn’t an investor in the way regular people are. He doesn’t passively put his money into companies. He often buys controlling stakes in a company - either taking them over entirely or getting a board set where he can change the way the company operates.
Comparing BH return with your average Joe is like comparing a casual gambler with one who does it professionally and often find edges nobody else has.
When making a comparison like that, the endpoints really matter. How many of the last 20 years has he been beating the market? And the next 10? Today is at an extreme in valuations and of course everyone who is betting on a fall will look bad until suddenly they don't. It's currently not possible to say whether sitting on cash is stupid or wise, the next few years will bear that out one way or another.
The next 10? I don't know, I can't predict the future. And finding out 10 years from now he didn't beat the market for 30 years, is half a lifetime of investing (most of your adult life). Not like you can go back and fix that.
It's 20 years of failing to beat a simple "invest in indexes and forget it". So basically an adult who followed index investing for the last 20 years can say "I have higher returns than Buffet".
Is it really 20 years of failing to beat the market, or is it that, this year, his average over 20 years has failed to beat the market? He may well have been up on the market most of the time until the last 2-3 years of blowout toppiness in which the market doubled. Those are different things, which is why calculating an average which includes extreme is not always helpful.
Exactly my point in the article.
As always, Buffett said it best, "By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals."
More here: https://monevator.com/warren-buffett-passive-investing
I would also add that the portfolio he manages is over 350 billion. That's a huge chunk of money to invest. The number of places where he can invest without overpowering the investment is very limited. He's mostly left with big companies that aren't growing as fast as the rest of the market. That's my guess.
Exactly.
Huge fan of Buffett myself. Of course, BRK could outperform SPX in the years to come, but the probability is stacked against it. The larger and more diversified the company becomes, the more its returns start mirroring the broader market.
Impressive but still he has under performed.
So it seems that Buffet, ironically, does not follow his own advice of simply buying an ETF and holding it.
Also, I know some "celebrity traders" in Poland who advertise their IKE (think of it like a Polish version of Roth IRA account), where out of 170,000 PLN cash savings over 10-12 years they can get 1,800,000 PLN (for the average return of 37% per year) - how's that for beating the market?
That's not very hard in an economy which has grown as quickly as Poland's.
Find another country which will have the same growth for the next 20 years, invest there, and you'll see similar results.
Poland's economy is booming, but the Polish stock market is not. I mean, it peaked in 2007/2008, and hasn't been able to beat that All Time High since.
One of the problems is that for smaller economies (including Nigeria, below), investing requires local knowledge. A US index fund will roughly track the US economy. The 20 largest local companies in Poland? Not so much.
In other words, it's a place for active trading. Investing in the former Soviet companies at the time of the collapse of communism would have been a bad bet (but reflected in the WIG20). Investing in the startups displacing them? Great bet.
Real estate too. Having Polish land valued at a tiny fraction of German land in 1990 was clearly not long-term sustainable.
My expectation is that the Polish per-capita GDP will reach that of Western powers in at most a decade or two, which gives a natural 4x return over baseline. It's not the astronomical return of post-Soviet era, but it's still large.
In other words, smaller economies are a good place for active trading. I don't do it since if I did without local knowledge, my returns would be similar to the 1x of the WIG20, rather than the 10x of active traders in Poland.
Africa... maybe. Not a lot of Nigerian ETFs, and where there are, they're heavily tilted towards foreign companies like Nestle or US oil.
37% CAGR over a decade? Hope people aren't falling for that.
Anyone with a well balanced portfolio of asset classes lost to the "market", which I suppose we mean the S&P 500. Bonds prices were killed the last year or two. I would argue the S&P, being about 25% tech stocks, is not as diversified as people think. Tech did great the last 20 years, and maybe they will continue. But it is risky to JUST invest in the S&P.
The longer you stay invested, the less risky it becomes.
Following is the percentage of periods that earned a positive return in the stock market, for different holding durations:
1 day: 52% 3 months: 61% 1 year: 68% 3 years: 75% 5 years: 80% 10 years: 88% 20 years: 100%
From the data in the article, the underperformance has really set in during the last 6 years. It’s a progressive decline.
Pandemic market distortion maybe ? Warren and Charlie just getting long in the tooth and slowing down ? Are the up-and-coming managers at BH (are there any ?) calling more of the shots and getting it wrong ?
More likely a result of the size of BRK. At over $700 bn, there are few investment opportunities that can really move the needle.
Berkshire's huge pile of cash is more than likely the reason for the latter-day under-performance.
In its early years, its cash pile was obviously much more modest, and it was easier to find opportunities which would fit Buffett's investment criteria while also moving the needle from an ROI standpoint.
But now that cash pile has grown substantially. It's orders of magnitude harder to find investments which move a $100 billion needle, and Buffett is unwilling to lower his standards such that he can find businesses to spend his cash on.
Hence Berkshire has little other choice but to park its un-deployed assets in relatively low-performing but liquid accounts, ready to invest if needed but otherwise not doing much for the bottom line in the meantime.
TL;DR- Berkshire may be a "victim" of its own success.
I think it also needs to be mentioned that he most likely isn't taking large risks, so the rewards are smaller but the risks are smaller as well.
I know that's essentially what you were saying, I just wanted to clarify it a bit.
I think this demonstrates the preciousness or scarcity of good books of business in public equity markets. Those with good long-term forecasts and not “get rich quick” exits over the last two decades.
Precisely.
Shows you the power of compounding successful interest early.
Does that table in the article not compare Buffet's share values vs S&P shares value plus their dividends?
The table shows total returns (including dividends) for both BRK and SPX.
I get completely different numbers (although the tldr is no less alarming). Does someone want to check my work? https://gist.github.com/RantyDave/41ac164cfcf527a91d3b97c8dd...
In your print statement ... (berkshire_return/100)*(1/10)-1:.4f ... gives the annualised return (assuming start with 100 and 10 years).
That brings you into alignment with the article.
funny thing is, it was probably about 10 years ago or more that he made a bet that no active manager could beat the market.
And he won that bet.
Yep. And I should clarify, in case anyone does some checking. He didn't bet that NO active managers would beat the market. Just that no one could pick which active managers would beat the market but it will be random, and inconsistent.
But if Berkshire didn't exist, would the stock market have performed the same way?