The S&P 500 returned more than 24,700% from 1965 - 2022. That comes out to about 9.9% annually. According to Berkshire Hathaway’s most recent annual report, its stock has returned over 3.7 million percent over the same time frame, or a compounded annual return of 19.8% (double the S&P 500)1.
Warren Buffett has sat at the helm of Berkshire for over half a century, and outperforming the S&P 500 by a few million percent has cemented his status as one of the greatest investors ever. However, the chart below shows that the story changes as the time horizon shrinks from decades down to days.
Source: Bloomberg, Darwin Asset Management analysis.
Starting on the right, there hasn’t been a single 15-year period when Buffett underperformed the S&P 500. That’s a staggering feat but also a testament to his patience and focus on fundamentals. But as the time horizon shortens, the Oracle of Omaha does worse. Not only has he lost to the S&P 500 one out of every three years, he has done no better than a coin toss on a monthly and daily basis.
Three takeaways here. First, if one of the smartest and most skilled investors to ever walk on earth can’t consistently beat the S&P 500 daily, monthly, or even annually, then neither can you nor I. Spending too much time on the sentiment of the market risks losing the forest for the trees, which usually ends badly. But this chart shows that there’s no reason to even try. Buffett’s success proves you don’t need to outperform every year to build wealth.
Second, be very careful to take annual returns too seriously. Think about what an investor would have left on the table had they “fired” Buffett after a year when he lost to the S&P 500. No question returns matter, but every money manager underperforms their benchmark at times. Assessing skill takes more than just asking, “What have you done for me lately?”
Third, Albert Einstein famously said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
There is simply no better way to describe the astonishing power of compounding. Warren Buffett didn’t achieve so much success by knowing what stocks were hot at any given time. He got there because early on, he understood compounding better than the rest, and it’s a lesson that can benefit us all.
But compounding requires patience. It doesn’t happen overnight or even in a year or two. The chart below shows this power takes a while to kick in, but when it does, there’s nothing quite like it. This compares the effects of compound interest on a $10,000 initial investment using different rates of return.
The Bottom Line
Few people will ever be as wealthy as Warren Buffett. He is a prodigy, and only so many are walking around. But we don’t need to be geniuses to achieve our financial goals (unless those include becoming a billionaire investor).
Investing is an odd profession because it’s one of the few where a novice with zero experience and education can achieve success. Think about it. Surgeons and litigators spend years perfecting their trade. Beginners wouldn’t stand a chance in the operating room or a court of law.
But fancy degrees, residencies, and clerkships are neither prerequisites nor assurances for investing success. Let’s revisit the three lessons discussed above – daily market movements are irrelevant, annual returns can be a trap, and compounding is awesome. All of these can benefit any investment strategy by any investor at any time. It just takes discipline and keeping it together when markets go crazy. Two simple ways to do that are to target a digestible level of risk and stop watching financial news.
The bottom line is that just because the advice from an investing legend may seem relatively simplistic to follow, that doesn’t mean it’s easy. Tolerating market declines and sticking with a strategy through periods of underperformance take a strong stomach. But that’s the price we must occasionally pay to achieve our financial goals.
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.