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Monday, March 1, 2021
Warren Buffett has had years of underperformance and a lot of bad stock picks
For more than half a century, he's been responsible for the performance of Berkshire and its legendary stock portfolio, which have long track records of market-beating returns.
But here's what every serious investor needs to know about Buffett: despite above-average performance, there have been many years Berkshire underperformed the market and there have been many individual stock trades that have lost mountains of money.
Long-term outperformance comes with many years of underperformance
Warren Buffett's annual letter to Berkshire shareholders was released on Saturday, and as usual the first page compares the annual performance of Berkshire against that of the S&P 500 (^GSPC) since 1965.*
Berkshire shares have seen an average annual return of 20.0% compared to the S&P 500's 10.2% gain during that period.
But as you can see from the individual data points, there are many years when the S&P outperformed Berkshire.
A good long-term investment strategy will not produce desired returns year in and year out. Rather, it'll make progress toward some long-term goal over time as fat years more than offset lean years.
"Whatever today’s figures, Charlie Munger, my long-time partner, and I firmly believe that, over time, Berkshire’s capital gains from its investment holdings will be substantial," Buffett wrote on Saturday.
Furthermore, it's worth noting that neither Berkshire nor the S&P saw many years where they delivered an average return. Most years either saw massive gains or very disappointing performance. Average almost never happens in markets.
Great stock pickers pick a lot of losers
And just because Buffett may be one of the greatest stock pickers in history doesn't mean all of his stock picks have been winners over time.
Just a quick glance at Berkshire's current top 15 stock investments reveals plenty of positions that are held below cost (i.e. they've lost money).
To his credit, few people are more vocal about Buffett's mistakes than Buffett himself.
In 2020, Berkshire booked a $9.8 billion write-down on those assets. One massive "mistake"he discussed in his annual letter was Precision Castparts (PCC), a once publicly-traded company that Berkshire acquired outright in 2016 in a $37 billion deal.
"I paid too much for the company," Buffett wrote. "I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business."
"PCC is far from my first error of that sort," he added. "But it’s a big one."
It's not hard to find times Buffett lost money on a trade or missed out on a big opportunity. Just a year ago, Berkshire dumped airline stocks near their lows just before they roared back along with the other reopening trades.
But a successful investor shouldn’t be judged by his or her mistakes. Rather, they should be judged by the degree to which they are able to achieve their long-term goals.
This goes for all investors who will repeatedly buy too late, sell too early, and miss out on big opportunities that become obvious in hindsight.
So if you're making a lot of mistakes but have a sound strategy and the discipline to stick to it during periods of underperformance, then maybe you too can be as imperfectly successful as Warren Buffett.
*Since 2019, Buffett has presented Berkshire's performance as measured by market value. Prior to that, it was book value. Buffett made the change because he felt market value was going to better reflect the performance of the company. For our purposes, all you need to know is that both Berkshire's book value and market value have smoked the S&P 500 over that half-century.
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