Investor Alert
Mark Hulbert

Mark Hulbert Archives | Email alerts

March 1, 2016, 5:09 a.m. EST

This is the most important thing Warren Buffett said in his annual letter

Buffett’s recent returns can teach us to be realistic about stocks

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Berkshire Hathaway Inc. Cl A (BRK.A)
  • X
    Berkshire Hathaway Inc. Cl B (BRK.B)

or Cancel Already have a watchlist? Log In

By Mark Hulbert, MarketWatch


CHAPEL HILL, N.C. (MarketWatch) — The most important revelation in Warren Buffett’s latest annual letter — released this past weekend — is how modest his performance has been.

The book value of his company, Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.44%  , /zigman2/quotes/200060694/composite BRK.B +0.83%  grew just 6.4% in 2015. And last year wasn’t an aberration: His 15-year annualized return also is in the single digits.

A visitor from another planet would wonder why Buffett is considered the most successful investor alive today. After all, triple-digit — even quadruple-digit — annual returns are regularly advertised on the Internet. For example, the website on which I read a summary of Buffett’s annual letter contained an advertisement for a newsletter whose recent performance is 4,096% on an annualized basis.

I wonder how many detected the irony.

Click to Play

Warren Buffett’s latest annual letter: key points

Warren Buffett delivered his latest letter to Berkshire Hathaway shareholders on Saturday, and it had everything his investors have come to expect. WSJ's Erik Holm reports. Photo: Getty

To be sure, most readily concede that advertisements like the one I referred to above are exaggerated. But I find that investors nevertheless tempted to sign up anyway, reasoning that even if the returns are inflated by a factor of two, three, or even four then they still are impressive.

These investors’ reasoning illustrates what marketers sometimes call the “bigger lie theory:” Making a claim that is so outrageous that no one would suspect that the person making it has little or no basis for it.

I know you’ll be shocked to learn that some investment advisers’ performance claims have no basis in fact whatsoever.

Lying is only part of the problem, however. Even when advisers honestly report their returns, many pick and choose a time period in which their performance is off the charts. The thing you need to keep in mind in such cases is that sky-high returns inevitably fall back to earth — a process statisticians refer to as “regression to the mean.”

The chart above illustrates this regression to the mean using the investment newsletter track records calculated by the Hulbert Financial Digest over the last four decades. The chart shows the investment strategy with the absolute best annualized returns over various periods through the end of this past January.

Notice how the returns quickly decline as you focus on periods longer than the recent past. By the time periods are measured in decades rather than years, the best returns among those I monitor are less than 15% annualized.

It’s this decades-long perspective that showcases Buffett’s real achievement: His annualized return since he took over Berkshire Hathaway in the 1960s is just shy of 20% — markedly better than not just the best investment newsletter, but the best mutual fund or institutional money manager. This is why Buffett is widely heralded as the most successful investor alive today.

The bottom line: Buffett’s modest performance over the past 15 years can teach us what is realistic in the investment arena. If the most successful investor alive today was able to deliver just single-digit gains annualized over a 15-year stretch, then what are the chances we can do better? Call me if you think you can: I have a bridge to sell you.

Click here to inquire about subscriptions to the Hulbert Sentiment Indexes.

$ 315,156
+1,376 +0.44%
Volume: 176.00
Sept. 25, 2020 4:01p
P/E Ratio
Dividend Yield
Market Cap
$502.26 billion
Rev. per Employee
$ 210.45
+1.73 +0.83%
Volume: 3.56M
Sept. 25, 2020 4:02p
P/E Ratio
Dividend Yield
Market Cap
$502.26 billion
Rev. per Employee

Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980.

This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

About Mark Hulbert

RSS News feed

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD...

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron’s.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC’s World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What’s Working Now.

More from Mark Hulbert

  1. This mutual fund may have cracked the ‘Buffett Code’ — Berkshire Hathaway’s secret sauce
  2. Hope to retire someday? See if you can answer these six simple questions
  3. Here’s how stocks typically perform in October and why you may want to buckle up
  4. How to nearly triple your return with U.S. Treasurys
  5. Is sequence risk really a big deal for retirees?

Featured Commentary »

Link to MarketWatch's Slice.