Reviewing the figures in the most recent letter published last week, something stands out: The era of Berkshire’s routine outperformance of market indices has come to a close.
Warren Buffett opens his annual letter to Berkshire Hathaway shareholders with a rundown of the company’s performance compared to the S&P 500, in every year since Buffett took over the former textile maker in 1965.
Over the past decade or so, Berkshire’s performance relative to the S&P 500 hasn’t met the high expectations set in 1980s and 1990s. But the shrinking gap isn’t exactly a sign that Buffett, 87, is losing his touch.
Rather, the decline in Berkshire’s returns is in part a consequence of success. In 1980, at the peak of its outperformance of the S&P 500, Berkshire’s market cap was $420 million; today, it is $516 billion. A return that would have doubled the company’s value in 1980 adds just 0.08% to its worth now.
The task of identifying undervalued companies gets increasingly difficult with scale, too. Berkshire already owns part or all of more than 100 companies. Identifying the next 100 under-appreciated investments is a much harder—if not impossible—task. If Berkshire was starting over, with “only” a few billion to put to work, Buffet might have a shot at performing as well as he did 30 years ago.
As Matthew Frankel at the Motley Fool points out, were Berkshire to grow for the next 50 years at the same rate as the past 50 years, it would be worth $7.4 quadrillion dollars, which is about 30 times the value of all the wealth of everyone currently on Earth. As good as Berkshire has been for investors over the years, it’s not possible for any single company to make all the money.