Being a great investor is incredibly hard. Don’t let anyone tell you otherwise. To illustrate this, we took a well-known investment and examined it over two time periods against the Standard and Poor’s 500 Index. The results were fascinating.
Been Down So Long
The chart below extends from 2009 – 2013. The blue line represents the return of the mystery investment (Investment B) and the orange line represents the S&P 500. If you compare the returns over this five year period, Investment B trails by nearly five percent on an annualized basis. That translates to a cumulative underperformance of approximately 43 percent over the same time period. After watching the investment lose to its benchmark five years in a row, even the most disciplined investors would be tempted to cut their losses and launch this investment from their portfolios!
Against All Odds
Let’s dig a little deeper and see what unfolds. Below is another chart comparing the same investment against the S&P 500, only this graph stretches from 1997 (near the investment’s inception) through 2014.This picture is drastically different; over this time frame, Investment B outperformed its benchmark by nearly 300 percent cumulatively. Here’s an even more staggering statistic—it outperformed despite only beating the benchmark in roughly 60 percent of the calendar years. Quite remarkable to beat an index by such a wide margin despite having a “winning percentage” slightly better than a coin flip.
Now For the Punchline
The mystery investment is Berkshire Hathaway stock (BRK.B), the company run by the great Warren Buffett. Yes, despite being lauded (rightfully so) as one of the great investors, even the Oracle of Omaha himself is not immune from stretches of disappointing performance. If you were a Berkshire (BRK.B) shareholder since 1997, you would have had to endure seven years of underperformance, three of which came from 2009 – 2013. Imagine how difficult it was to watch the S&P 500 soar while your Berkshire investment suffered. Nonetheless, staying patient and holding on through rocky times yielded handsome rewards.
Markets pay no mind to the dates on our calendar. So is beating the benchmark from January 1 to December 31 really the best proxy for judging an investment? Clearly not.
The lessons learned through this example are universal across all areas of investing. Short-term performance tells a great investor next to nothing. Long-term investments that have a proper place in someone’s portfolio shouldn’t be replaced because of recent underperformance alone. In fact, realizing the potential of a great investment often requires looking beyond the present day. To that end, great investors might actually enjoy watching their investment stray from its index in the short term, taking it as an indicator of meaningful rewards yet to come.