Warren Buffett Has Underperformed the Stock Market for the Last 20 Years (2024)

Alright, before I say anything else, let me say this first. I'm a Warren Buffett fan. And not just because he's the most successful investor of all time. But also because of his integrity, his wisdom, and his wit—all of which he delivers in his characteristically affable style. I mean, it's hard not to be inspired by someone who practices their craft with such devotion and grace. So, anything I say here is not so much a criticism of him as it is a comment on the nature of investing itself.

Now that I've paid my respects, I feel comfortable saying what needs to be said. That under the leadership of Warren Buffett, Berkshire Hathaway has underperformed the stock market for the last 20 years.

Seriously?!

Yeah, seriously.

Here's the table from Buffett's 2022 letter to Berkshire shareholders that shows the annual returns of the Berkshire stock and that of the S&P 500, going back to 1965.

Let me draw your attention to the last two rows of the table, which show the compounded annual gain since 1965 and also the overall gain since then.

Beginning in 1965, over a period of 58 years, the S&P 500, dividends included, delivered a compounded annual gain of 9.9%, while the Berkshire stock delivered 19.8%.

That doesn't seem like such a big deal until you see that the overall gain for the S&P 500 during the same period was 24,708%, while that for the Berkshire stock was 3,787,464%.

Damn. That almost seems like a misprint.

I know what you're thinking. "I gotta get in on that sweet sweet Berkshire action asap." Yeah?

I get it. I had the same thought.

But, not so fast.

We're not starting in 1965 and investing for the next 58 years. We're starting in 2023 and investing for, perhaps, the next 10, 20, or 30 years.

10 years is a reasonably long investment period, so let's look at how Berkshire has performed against the S&P 500 over various 10 year periods.

The 10Y-BRK column shows 10 year compounded annual returns for Berkshire, while the 10Y-SPX shows them for the S&P 500. The important column is Difference, which shows the outperformance of Berkshire over the S&P 500.

Honestly, I was very surprised by these results. I had expected the Difference column to be largely green with some scattered reds, i.e. the Berkshire stock outperforming the S&P 500 over most 10-year periods with some occasional underperforming periods.

But, as you can see, the greens are all clustered in the beginning, with things gradually moving to the yellows, and, from about 2003, it's all reds.

I did the math and starting from 1965 to 2002, a period of 38 years, the compounded annual return of the S&P 500 was 10.02% while that of Berkshire was 25.66%.

But—and here's the kicker—from 2003 to 2022, a period of 20 years, the S&P 500 delivered a 9.80% compounded annual return while Berkshire came in lower at 9.75%.

Now imagine you were someone in 2003, looking for the best possible investment. You'd look at Berkshire's crazy outperformance over the S&P 500 over a 38 year period and would, of course, invest in the stock. I mean, who wouldn't. But over the next 20 years, your investment would've done slightly worse than if you had just bought a low-cost S&P 500 index fund. Thankfully, not by a massive margin, but the outcome would've definitely not been the one you were expecting when you had bought the stock.

It's not for nothing that every investment proposal in the world ends with the disclaimer that past performance is no guarantee of future results.

If someone like Warren Buffett could not beat the S&P 500 for 20 long years, what hope is there for mere mortals like us.

And yet we continue to chase outperformance—moving into investments with recent high returns, moving out as those high performers inevitably disappoint, paying all kinds of transaction costs, management fees, and taxes along the way, not to mention the psychological costs of constantly wondering if we've made the right call—only to see our portfolios not even deliver average returns.

Because here's the thing. A majority of professional investment managers—to say nothing of amateur investors—underperform the market even over as short a period as 1 year. And the longer the investment period gets, the worse the underperformance gets.

S&P, the company, publishes an annual report of the performance of actively managed funds versus the S&P indices. And every single year they find active managers consistently underperforming the indices.

Here's the report for 2022 with performance data for the US market and a bunch of others.

93.40% of all actively managed large-cap US funds underperformed the S&P 500 over a 15 year period.

Let that sink in.

Given that Berkshire underperformed the S&P 500 only slightly over a 20 year period is actually a credit to the quality of investment management by Warren Buffett.

Would Berkshire continue to underperform the S&P 500 over the next 20 years or would it now start outperforming? I don't know. And I doubt if Buffett himself would answer any differently.

So, what's the alternative to this outperformance-chasing, anxiety-inducing, and eventually disappointing investment strategy that most of us follow?

The answer is simple. Index funds.

A low-cost index fund won't outperform the market (by definition), and won't make for exciting dinner table conversation (unlike the latest investment fad), but it will almost certainly deliver better long-term returns than any active investment strategy that you might follow, whether directly yourself or through a fund.

Sure, you might get lucky and end up picking an investment that delivers long-term above market returns. But are you, literally, willing to bet your life savings on it?

Moreover, putting your money in an index fund comes with an added advantage. It saves you the constant worry that your investments might underperform the market and also the hassle of moving to other investments if they indeed do.

The fact that the greatest investor of all time has not been able to outperform a simple broad market index over a period of two decades should at least give us a pause and make us question our own ability of doing so over the next two.

Because recognising our limitations and having a measure of humility in the face of extreme complexities and uncertainties of financial markets might just be the thing we need to finally set ourselves on the path to becoming better, more effective investors.