“Of the billionaires I have known, money just brings out the basic traits in them.
If they were jerks before they had money, they are now just jerks with a billion dollars.”
Warren Buffett, CEO of Berkshire Hathaway, is often regarded as being the world’s best
investor.
However, in his most recent annual shareholder letter dated February 22, 2020, we can see
that the company’s recent performance hasn’t been as good as what most investors would
have hoped.
In 2019, you would have been much better off investing in the S&P500 (which represents
500 of the largest US companies).
Berkshire only returned 11.0%, which is still good, but the S&P returned 31.5%!
To be fair to Warren Buffett, since 1965, he’s managed to get his investors annualised
returns of over 20%!
The S&P has only averaged 10%.
But if we take a look at the last five years, we can see that the S&P500 has still outperformed
Berkshire Hathaway with the S&P going up by more than 61%, while Berkshire have only gone
up by about 57%.
It’s still good, but not market-beating.
If we look at long-term performance over the last 30 years, Berkshire Hathaway has absolutely
smashed the S&P500 with a return of over 4,500%.
Investing in the S&P would have only returned you about 800% over the same time frame, which
is still fantastic, but nothing compared to Berkshire Hathaway.
But as we all know, a company shouldn’t rest on its laurels.
I think this 5-year chart is much more relevant to the modern investor.
Today’s climate is not the same climate as 30 years ago.
Warren Buffett is now 89 years old.
His partner and vice-chairman of Berkshire, Charlie Munger, is now 96 years old.
Some of you might be asking, and rightfully so, have these guys passed their investing
use-by-dates?
I’m not sure, but in the last five years, you would have been better off buying a market-tracking
ETF rather than investing your money with Berkshire Hathaway.
For example, in Australia, if you bought Vanguard’s VGS ETF when it was first released in November
of 2014, you would have easily outperformed Berkshire Hathaway, 63.5% vs about 47%.
Just while we’re here, I’ve always found it interesting how much a single share of
Berkshire Hathaway costs.
US$327,000!
That’s like a house, or a quarter of a house if you live in Sydney.
But to be fair to Warren Buffett, over recent years, he has publicly recommended that generally
speaking, people would be better off just investing in a low-cost index fund instead
of trying to play the market.
He told CNBC last year,
“I think it’s the best investment [a low-cost S&P500 index fund] — because most people
don’t know how to pick stocks.
And – most of the time – I don’t know how to pick stocks.”
If the world’s best investor is telling us not to gamble on individual stock-picking,
and the fact that Berkshire Hathaway has been underperforming the market in recent years,
I would suggest that investors, especially casual investors like me, should listen to
Mr Buffett.
Something has changed over the last few decades.
Seemingly, it’s no longer as easy to pick which companies will perform well over the
long-term.
But as a rule, the entire market tends to perform well over time.
Individual companies come and go, but the market steadily climbs upwards.
Of course, recent news tells us that the market is currently crashing.
How long will this go on for?
Who knows!
In his recent shareholder letter, Mr Buffet had some good advice:
“It is almost certain that equities will over time perform far better than long-term,
fixed-rate debt instruments.
That rosy prediction comes with a warning: Anything can happen to stock prices tomorrow.
Occasionally, there will be major drops in the market, perhaps
of 50% magnitude or even greater.
But the combination of The American Tailwind, about which I wrote last year, and the compounding
wonders described by [Edgar Lawrence Smith], will make equities the much better long-term
choice for the individual who does not use borrowed money and who can control his or
her emotions.
Others?
Beware!”
The key points: Don’t use borrowed money to invest; and Control your emotions.
That is, you shouldn’t buy when everyone else is buying, and you shouldn’t sell just
because everyone else is selling.
Emotional buying and selling almost always results in failure.
Anyway, that’s my video on Warren Buffet’s recent shareholder letter.
Regardless of whether Berkshire Hathaway aren’t doing as well as expected, at least Mr Buffett
can publicly analyse the situation and offer sound advice.
I guess it’s up to us whether we listen to it or not.