Three Things People Get Wrong About Warren Buffett and Berkshire

90-year old Warren Buffett is the Chair of Berkshire Hathaway. He published his annual letter to shareholders on Saturday and you can read it at this link. In reading it, three things stood out to me that many people get wrong about Buffett and his company.

Myth #1: Buffett Always Beat The Indexes

Annual % Value Change
YearBerkshireS&P 500 Index
20202.410.2
20191131.5
20182.8-4.4
201721.921.8
201623.412
2015-12.51.4
20142713.7

Take a look at the above chart. What do you notice? For one thing, the value of Berkshire Hathaway stock does not always beat the S&P 500 index. In the last seven years, the Berkshire stock did better than the S&P 500 index three times and the opposite is also true. In 2017, the results are the same. 2015 was a particulary bad year for Buffett vs. the index.

As an aside, since 1965, the annual return for Berkshire shareholders is 20%. This is a remarkable return for shareholders, however, if you look at all the returns since 1965, none of the annual returns were exactly 20%. “Average annual returns” are just that — averages of highs, lows and near average.

Myth #2: Buffett Never Makes a Mistake

In this year’s letter, Buffett reported a write-down of $11 billion on Precision Castparts (PCC). What happened? Buffett guessed wrong. He admitted he was too optimistic about the business. In the last line of this letter segment, Buffett wrote, “PCC is far from my first error of that sort. But it’s a big one.” He makes mistakes as we all do and I admire him for admitting his blunders.

Myth #3: Buffett Is a Great Investor

He may be a good investor, but primarily Buffett is a great business owner. The 15 stocks held by Berkshire are a small part of the total business. The stocks that Buffett has chosen are a blend of mostly big U.S. companies whose names you and I know. They may even be good companies to own, but they are not a blueprint for an investment portfolio. The holdings are not diversified. There are no small companies in the list and no non-US based companies.

Summary

I encourage everyone to read the annual letters from Buffett as a way to learn about how to run a business in the U.S. Buffett and his CFO Charlie Munger are business icons and from them we can learn a great deal. However, keep Buffett’s words and approach in perspective and develop your own investment philosophy.

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