When Warren Buffett’s annual letter to Berkshire Hathaway shareholders was published last weekend, media coverage focused on the chairman and CEO’s mea culpaabout Berkshire’s investment in Kraft Heinz KHC, -2.38% his lament that he couldn’t find the next big investment to buy, the accounting change that caused Berkshire to take a $20 billion write-down, and, once again, his failure to announce any formal succession plans even though Buffett is 88 years old and Vice Chairman Charlie Munger is 95.
But one thing jumped out at me in his annual letter and a subsequent extended interview with Becky Quick of CNBC: his acknowledgment that his best stock pickers hadn’t beaten the market and his tacit admission that investors couldn’t expect Berkshire Hathaway BRK.A, +0.88% BRK.B, +0.91% to do so in the future, either.
Todd Combs and Ted Wechsler joined Berkshire as investment managers within a year of each other in 2011-2012. “Overall, they are a tiny bit behind the S&P SPX, +0.69% each by just almost the same margin over the same time,” Buffett told Quick. “They’ve done better than I have.”
Humility aside, that’s quite an admission: Warren Buffett, the greatest investor in history, is saying that neither he nor his best handpicked stock-picking talent has achieved the essential goal of active money management — beating a boring old index fund any schlemiel can buy in his or her 401(k).
And the numbers show he’s right. Since the bear market low of March 9, 2009. Berkshire Hathaway Class B stock advanced by 338% through Wednesday’s market close.
But remember: Buffett loves to collect dividends from the stocks he owns — Berkshire earned $3.8 billion in dividends in 2018 — but he hates paying them out to his shareholders. Why? Because he’d rather invest the cash internally or deploy it in future investments (the kind he says he can’t find these days).
So while Berkshire shareholders don’t earn dividends, unsophisticated investors in the plain-vanilla S&P 500 index fund or ETF do — about 1.8%-2% a year since 2009. If they reinvested those dividends, as good long-term investors...