Buffett, Benchmarks, and Why They Hardly Matter

Source: Ken Teegardin / Flickr

Historically, Berkshire Hathaway¬†(NYSE:BRKA)(NYSE:BRKB) — the conglomerate holding company run by Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger — has achieved the rare and elusive feat of beating the market. The per-share book value of Berkshire Hathaway has increased more quickly than the S&P 500 equity index for every five-year period since 1965, boasting a compounded annual gain of 19.7 percent compared to 9.4 percent for the market, including dividends.

The track record is nothing short of astonishing, and it has earned Buffett a legendary reputation that would seem fictitious if it weren’t backed up by data. Research into Buffett’s investing strategy conducted by the National Bureau of Economic Research indicates that far from simply being lucky, Berkshire Hathaway has managed to produce outsize returns with minimal risk consistently for at least the past 30 years.

But behind every great success story, however sustained, are a couple of failures, and part of what has made Buffett so successful is his capacity to recognize and admit to mistakes. Every dollar he loses is an investment in the education and wisdom necessary to make better decisions in the future.

Over a long enough time period, though, it’s reasonable to expect that even savvy investors like Buffett and his team will make a prolonged series of errors — or at least, sub-par victories — that will put a lasting blemish on Berkshire Hathaway’s sterling record. And according to some analyst estimates, that may have happened over the past five-year period.

Beating the performance of the S&P 500 over a five-year horizon is a benchmark that Berkshire Hathaway set for itself. Beating the benchmark makes a compelling statement, especially because most funds lag the benchmark, and Berkshire Hathaway has consistently beat this benchmark over the past 44 years.

Analyst estimates by the folks at Barclays, though, put the past five-year increase in the book value of Berkshire Hathaway at 86 percent. In comparison, the S&P 500 has returned 128 percent. This, if accurate — and if you want to get technical about it — constitutes a miss. There are some mitigating factors to the results, such as the S&P 500′s relatively enormous crash during the crisis compared to Berkshire’s more modest decline, that undermine the significance of the miss.

At this point, though, missing the benchmark doesn’t actually seem to matter that much. Berkshire Hathaway non-insurance earnings have increased rapidly recently, climbing as the firm evolved alongside the changing market. The company and its portfolio are as strong as ever, producing high returns with low risk. The company’s return has still outpaced the market over the long run and promises to continue doing so into the foreseeable future. It would take a much more serious, prolonged series of misses to seriously blemish the company’s record.