There was news this week that Warren Buffett, famed manager of Berkshire Hathaway, did not beat the S&P 500 on a 5-year rolling basis for the first time in his career. Does this mean that he did a poor job and failed? He would probably say that he did because his stated benchmark goal has always been to beat the S&P 500 on a 5-year rolling basis. However, I would say that he did not fail.
I’ve always been surprised that he’s willing to assess performance over a 5 year basis given that he’s a long-term value investor. 5 years isn’t very long and often doesn’t capture an entire market cycle. I would contend that any investment manager should be reviewed for his/her performance through an entire market cycle, with an emphasis on performance during down markets. This is because the true value of an advisor is not how much money they can make you, but how much they can save you when the markets get crazy.
A 5-year rolling period takes us back to Jan 1, 2009 – about two months before the March low (the bottom of the 2007-2009 bear market). That means that we’ve been climbing for the large majority of the time period. The charts below show the S&P 500 ETF (to include dividends), compared to Berkshire Hathaway’s stock (even though Buffett uses book value of equity, not market value of the actual stock for comparison purposes. But this is close enough to approximate).
S&P 500 ETF (black) vs. Berkshire Hathaway (green): 5 years
However, if we begin our period of comparison at the top of the last bull market in October, 2007, we can see that Berkshire Hathaway is ahead of the S&P 500. This is because they lost less during the bear market which means they don’t have to make as much during the bull market and they’ll still probably win.
S&P 500 ETF (black) vs. Berkshire (green): Oct 2007 – today
The lesson here is that building wealth in the long-term is more about out-performing during the down years than the up years. It all boils down to risk management.
Thanks for following and have a great weekend!
-Nick