When Warren Buffett’s annual letter to Berkshire Hathaway shareholders was published last weekend, media coverage focused on the chairman and CEO’s mea culpaabout Berkshire’s investment in Kraft Heinz
his lament that he couldn’t find the next big investment to buy, the accounting change that caused Berkshire to take a $20 billion write-down, and, once again, his failure to announce any formal succession plans even though Buffett is 88 years old and Vice Chairman Charlie Munger is 95.
But one thing jumped out at me in his annual letter and a subsequent extended interview with Becky Quick of CNBC: his acknowledgment that his best stock pickers hadn’t beaten the market and his tacit admission that investors couldn’t expect Berkshire Hathaway
to do so in the future, either.
Todd Combs and Ted Wechsler joined Berkshire as investment managers within a year of each other in 2011-2012. “Overall, they are a tiny bit behind the S&P
each by just almost the same margin over the same time,” Buffett told Quick. “They’ve done better than I have.”
Humility aside, that’s quite an admission: Warren Buffett, the greatest investor in history, is saying that neither he nor his best handpicked stock-picking talent has achieved the essential goal of active money management — beating a boring old index fund any schlemiel can buy in his or her 401(k).
And the numbers show he’s right. Since the bear market low of March 9, 2009. Berkshire Hathaway Class B stock advanced by 338% through Wednesday’s market close.
But remember: Buffett loves to collect dividends from the stocks he owns — Berkshire earned $3.8 billion in dividends in 2018 — but he hates paying them out to his shareholders. Why? Because he’d rather invest the cash internally or deploy it in future investments (the kind he says he can’t find these days).
So while Berkshire shareholders don’t earn dividends, unsophisticated investors in the plain-vanilla S&P 500 index fund or ETF do — about 1.8%-2% a year since 2009. If they reinvested those dividends, as good long-term investors should, anyone who owned the SDPR S&P 500 ETF
since the bull market began would have racked up a 403% gain through Wednesday’s close, absolutely smoking Berkshire’s performance. (It should be noted, however, that Berkshire, whose portfolio is chock-full of big, cash-rich companies, gained 28.4% from the March 2000 bull market top through the March 2009 market low, while SPY lost nearly half its value over the same period, even while reinvesting dividends.)
It gets worse. Many people, myself included, think an S&P 500 index fund is inadequate to capture the market’s full potential return, because it doesn’t include small- or midcap stocks, which historically outperform the large-cap names in the S&P. A representative ETF that covers the whole U.S. stock market, Vanguard Total Market Index
has put both Berkshire and the S&P to shame: Since March 2009, it has risen by about 420%, including dividends. Game, set, and match.
That’s why we shouldn’t be surprised by Buffett’s own favorable comments about index funds. “If my [initial] $114.75 had been invested in a no-fee S&P 500 index fund [in 1942], and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019,” he wrote in the annual letter. “That is a gain of 5,288 for 1.” He said on CNBC that $10,000 invested in an index fund in 1942 (34 years before the first one opened, but never mind) would be worth $51 million today.
“Consistently buy an S&P 500 low-cost index fund,” he said last year. “I think it’s the thing that makes the most sense practically all of the time.” Securities laws would probably prevent him from touting Berkshire Hathaway stock, but Buffett is intellectually honest, and I don’t think he’d recommend shares in his own company over an index fund even if he could.
So, does Berkshire’s inability to beat the market over the last 10 years mean Buffett’s “losing it”? From the annual letter and his extended appearance on CNBC, at 88 he seems as sharp as ever. But maybe a decade-long bull market, the evolution of algorithms and artificial intelligence, and the overpowering logic of indexing have simply taken away the edge this magnificent investing brain maintained for six decades.
When Vanguard founder John Bogle died in January, I said he was the most influential investor of the 20th century, surpassing even Buffett. I suspect many people thought I was way off base.
But now even Buffett seems to be tacitly acknowledging that the long arc of investing history has finally caught up with him and Munger. Bogle’s unwavering advocacy of passive investing has given him a posthumous triumph over the man many people regard as the greatest investing genius the world has ever seen.
Howard R. Gold, a MarketWatch columnist, doesn’t own any shares in Berkshire Hathaway. Follow him on Twitter @howardrgold.