Warren Buffett Has Underperformed the Stock Market for the Last 20 Years

[Entrep]

Came across this https://www.linkedin.com/pulse/warre...ears-jain-cfa/ and wondered if any of you have an opinion on it.

AI summary for ease:

The writer begins by expressing admiration for Warren Buffett due to his success, integrity, wisdom, and affable nature. However, this admiration doesn't prevent the author from analyzing Buffett’s recent performance critically. According to the information provided, Berkshire Hathaway, under Buffett's leadership, has underperformed the stock market for the last 20 years. The author refers to a table from Buffett’s 2022 letter to shareholders that reveals this trend, highlighting a shift in the company's performance over the years.

Berkshire Hathaway had historically outperformed the S&P 500. From 1965 to 2002, the company enjoyed significant growth, yielding a compounded annual return of 25.66% compared to the S&P 500’s 10.02%. This trend began to change around 2003. For the subsequent 20 years, the S&P 500 delivered a 9.80% compounded annual return, slightly outperforming Berkshire’s 9.75%. This revelation leads the author to question the wisdom of chasing outperformance, an endeavor even the likes of Buffett has struggled with in recent decades.

This analysis introduces a broader critique of the practice of seeking extraordinary performance in investment. The writer cites data showing the underperformance of professional investment managers compared to market indices. A report for 2022 is mentioned, indicating that 93.40% of all actively managed large-cap US funds underperformed the S&P 500 over a 15-year period. In light of this, the author suggests that Berkshire’s slight underperformance is not an anomaly but rather indicative of a broader trend.

This realization forms the basis for advocating for a different investment strategy: index funds. The author suggests that low-cost index funds, while not exciting, offer stability and consistent returns over the long term. The absence of the need to outperform the market alleviates anxiety and the hassle associated with the constant movement between investments. The writer argues that the inability of a distinguished investor like Buffett to consistently outperform a broad market index over two decades should prompt a reevaluation of individual investment strategies.

[JeffW]

Came across this https://www.linkedin.com/pulse/warre...ears-jain-cfa/ and wondered if any of you have an opinion on it.

AI summary for ease:

I'm certainly not arguing against the thesis, but hypothetically if every investor adopted an Index Fund approach, how would share prices ever be derived?

[kiora]

Size matters
"To investigate fund size and performance, the authors use regression analysis and cross-sectional analysis and find that the common notions of declining expenses and returns are mostly true. Their analysis shows that a change in the size of a fund equal to a two-standard-deviation shock in the log of a fund's total assets yields a decline of 5.4 to 7.7 bps in monthly performance. This impact is approximately 65–96 bps annually before fees"
https://rpc.cfainstitute.org/en/rese...%2Dcap%20funds.

Picking leaders matters as does time frame

https://finance.yahoo.com/chart/IFT....NoYXJ0In19fX0-

Shorter time frame
https://finance.yahoo.com/chart/IFT....NoYXJ0In19fX0-

[SBQ]

You can cherry pick time frames to suit the narrative and timing DOES matter when you buy BRKA/B. It would not take much to have a higher return buying BRK stock if you bought at levels below the start of the year. Likewise you could fare worse if you bought at the highs of each year.

The bottom line is not all investments are equal from a tax perspective. Does owning an index ETF like VOO net you a better return under Kiwi Saver? You wil find after 40 or 50 years of compounding, 2/3rds of the gains would be loss through NZ's FIF tax and various mgt fees deducted every year.