Tuesday, March 3, 2015

Underperformance or Outperformance?

I did not expect to see the day that Warren Buffett's Berkshire Hathaway would underperform the S&P 500 in 5 out of 6 years, but that's basically what has happened. On the other hand, over the last 7 years (and also for any period longer than this), Berkshire has still handily outperformed this same benchmark! This is the more important indicator, in my opinion.

Berkshire's businesses are cash flow generators that can be expected to rack up growth in book value for the firm both in good times and in bad. But looking at the S&P 500 over just the last six years leaves out the fact that the S&P 500 had a lot of "potential energy" (to borrow a physics term) over this period thanks to its ridiculously bad performance in 2008. Leaving out that bad performance, which acts as a springboard for future returns, biases the comparison.

Berkshire's book value fell only 10% in 2008, so over the full cycle it is still outperforming the market despite its size acting as a retardant.

1 comment:

Anonymous said...

Book value is no longer as important at BRK, because the private businesses are marked at cost on the balance sheet, whereas publicly listed securities at market. So the 5 year comparison to the S&P is not very meaningful. See Carol Loomis' article for further detail.

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