Warren Buffett, the CEO of Berkshire Hathaway, used to tell people that he could outperform the massive S&P 500 over any 5-year period.
Well, not anymore.
An article came out this month pointing out the fact that he underperformed the S&P 500 over the past five years. But what I thought was interesting was what Buffett said about it.
Buffett Sets Fresh Goal as Berkshire Misses Five-Year Target - Bloomberg
Berkshire’s net worth failed to rise as much as the Standard & Poor’s 500 Index from the end of 2008 through 2013, the company’s annual report showed yesterday. It was the only five-year period that happened since Buffett took control in 1965. Still, the billionaire Berkshire chairman and chief executive officer said he can beat the index over equity market cycles, like he did in the six-year period that ended Dec. 31.
“Through full cycles in future years, we expect to do that again,” Buffett wrote in the report. “If we fail to do so, we will not have earned our pay.”
Buffett, 83, has criticized other companies for altering how they evaluate performance when such changes make managers look better. Even as he predicted that Omaha, Nebraska-based Berkshire would fall short of its goal last year, he wrote that he wouldn’t “change yardsticks.”
So instead of just going back five years, he went back six years. That sixth year was horrible for the S&P 500, so starting off in that year definitely made him look better.
I admit that Buffett's overall performance since 1965 is impressive, but if you go back to the beginning of the 21st century, his returns don't look very spectacular.
At the end of the 20th century, Berkshire Hathaway had given shareholders an average annual gain of 23.6% (see page 2).
But in its last shareholder report, the company said (on page 2) that its annual gain was 19.7%.
The company certainly isn't performing as well as it used to. At the end of the year 2000, its stock was trading at $71,000 per share. By the end of last year, its stock price had increased to $177,900 per share (an increase of 150.6%).
However, that's an average annual gain of just 7.3% over the past 13 years.
That would explain why his compounded annual gain is going down.
By the way, my own mutual fund has outperformed Berkshire as well. Considering the tax advantages I get from a 401(k), I don't think it's possible that Berkshire can outperform my mutual fund in the future. And changing yardsticks isn't really going to help.