In the comments section of yesterday’s article, a reader mentioned a recent data point that has been widely discussed by financial media: Warren Buffett’s average rate of return over the past 20 years has been lower than the S&P 500 index.
This data was initially surprising, but upon further investigation, we discover that there are many details behind this unexpected data that are worth considering.
Firstly, the rate of return mentioned here actually refers to the rate of return of Buffett’s entire team, not just Buffett’s personal investments. In the early years, to avoid the potential risks that are inherent in well-known natural laws, both Buffett and Charlie Munger gradually handed over more and more business operations to their succession team. The succession team initially performed quite well and even surpassed the two founders in terms of performance. However, this period of success did not last long, and the performance of the succession team declined. Not only did they fail to surpass the two founders, but they also consistently lagged behind the S&P 500 index for a significant period of time. Meanwhile, the two founders continued to maintain their remarkable track record.
When this data was first exposed by the American financial industry, many people were concerned about the future of Berkshire Hathaway once the two founders no longer helmed this massive empire. At the shareholders’ meeting, there was a scene where one of the successors, Ajit Jain, shouted to the audience, “No one is irreplaceable. I believe we have Tim Cook in the audience, and he has proven this point and set an example for many followers.”
To be honest, I approach this statement with great caution. Apart from team-related reasons, there are other factors that can partially explain why Berkshire Hathaway’s rate of return has started to decline.
Renowned Chinese private fund manager, Dan Bin, explained this phenomenon well in a recent interview. One reason is that the leading companies driving the US stock market index have undergone significant changes. The companies leading the S&P 500 index are now the few tech giants, and the tech industry is an area that Buffett tends to avoid. In this situation, it becomes increasingly difficult for Buffett to outperform the S&P 500 index through his traditional investment expertise.
Munger has also repeatedly mentioned this point in his speeches at the shareholders’ meeting. He said that the current investment market is no longer like it was when they were young, where good investment opportunities were relatively easy to find. Nowadays, investments are becoming increasingly challenging.
Furthermore, Berkshire Hathaway’s size has also grown over time, and maintaining a rate of return higher than the index with such a large scale is a huge challenge for them.
In order to meet this challenge, investing in Apple was an attempt by the two founders. When asked about their decision to invest in Apple, Munger said, “The company was forced to try investing in Apple due to the changing times.” In the face of the increasing difficulty of finding higher returns in investments, they had to explore new breakthroughs and new areas. Thus, they chose Apple.
Munger also mentioned that when they initially invested in Apple, they didn’t have a high level of confidence, and it was a process of trial and error. They have come this far by learning along the way.
From this phenomenon and these details, we can see that achieving long-term and stable returns above the index in the stock market is not an easy task.
Therefore, the two founders have repeatedly emphasized on multiple occasions that the best way for ordinary investors who do not have the time to research companies is to invest in index funds.
However, the majority of people are more interested in getting rich overnight rather than gradually building wealth.