In the comments section of yesterday’s article, a reader mentioned a data point that has been widely discussed by many financial media outlets recently: over the past 20 years, Warren Buffett’s average return rate has been lower than that of the S&P 500 index. When this data was first released, it was quite surprising. However, upon closer examination, we can uncover several details behind this unexpected data that are worth considering.
Firstly, it is important to note that the return rate mentioned here actually refers to the return rate of Buffett’s entire team, rather than Buffett’s personal investments. In the early years, to avoid any potential unforeseen consequences brought about by well-known natural laws, Buffett and his colleague Charlie Munger gradually handed over more and more business operations to their successors. Initially, the succession team performed quite well, with their performance even surpassing that of the two founders. However, this period of prosperity did not last long. Subsequently, the performance of the succession team declined, not only failing to surpass the two founders but also falling behind the S&P 500 index for a considerable period of time. Meanwhile, the two founders continued to maintain their impressive track record.
When this data was first exposed by the American financial industry, many people became concerned about the future of Berkshire Hathaway once the two founders are no longer in charge of this massive empire. At the shareholders’ meeting, there was a moment where one of the successors, Ajit Jain, shouted to the audience, “No one is irreplaceable. I believe we have Tim Cook in the audience, who has already 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 partly explain why Berkshire Hathaway’s return rate has started to decline. A well-known Chinese private fund manager, Dan Bin, provided a good explanation for this phenomenon in a recent interview: one reason is that the leaders driving the U.S. stock market index have undergone significant changes. The companies leading the S&P index now mainly consist of a few tech giants, which happen to be an area that Buffett is not particularly involved in. In this situation, relying on Buffett’s expertise in traditional investment areas to outperform the S&P 500 becomes increasingly difficult.
Charlie Munger has also repeatedly mentioned this point in his speeches at shareholder meetings. He said that the investment market nowadays is not like when they were young, where good investment opportunities could be easily found. Investing has become increasingly challenging. Moreover, Berkshire Hathaway’s size has continued to grow, and maintaining a return rate higher than the index with such a large size poses a significant challenge for them.
To tackle this challenge, investing in Apple was an attempt by the two founders. Munger mentioned in response to a shareholder’s question about investing in Apple stocks that “the company had to start investing in Apple due to the circumstances.” In the face of an increasingly difficult investment environment, if one wants to achieve higher returns, one must explore new breakthroughs and new fields. Thus, they chose Apple. Munger also mentioned that they didn’t have great confidence when they initially invested in Apple, but they learned and adapted along the way.
From this phenomenon and these details, we can also see that achieving returns higher than the index in the stock market in the long term and consistently is not an easy task. Therefore, the two founders have repeatedly emphasized in multiple occasions that for ordinary investors who do not have the time to research companies, the best method of investing in the stock market is through index funds. However, most people are more interested in getting rich overnight rather than gradually building wealth.
