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Monday, March 1, 2021

Warren Buffett has had years of underperformance and a lot of bad stock picks

Warren Buffett, the billionaire head of Berkshire Hathaway (BRK-A, BRK-B), will probably go down as the greatest investor in history.

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.