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How Warren Buffett Turned $19 Into $135,000

Photo: Young Productions

"Warren Buffett has lost his investing ability."

That's what they try to tell you. Don't listen. He is still one of the best investors of all time.

Over the weekend Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) released its annual report which includes the valuable letter from Warren Buffett. It is full of facts, figures, wisdom, quotes, and quips, but there was one number that stood above all the rest.

The trend ends
Last year, Buffett revealed in his annual letter there had never been a five-year stretch in which Berkshire Hathaway failed to beat the S&P 500 when comparing its book value growth to the appreciation of the stock market. Yet he cautioned; "the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five year wins will end."

Although Berkshire Hathaway posted a staggering 18.2% growth in its book value per share in 2013, it was far surpassed by the 32.4% growth seen by the S&P 500 last year. This gap of 14.2% was the fourth largest difference in the 49 year history of Berkshire Hathaway:

Source: Company Investor Relations.

This now means for the first time in the company's history, Berkshire Hathaway fell short of the five year return of the S&P 500. $100 invested in the book value of Berkshire Hathaway at the end of 2008 would now be worth $191, and $100 invested in the S&P 500 would be worth $228:

Source: Company Investor Relations.

This difference of 37% on the initial investment is a staggering discrepancy between the historical performance of Berkshire Hathaway relative to the S&P 500 when gauging the five year returns:

Source: Company Investor Relations.

While it is easy to think this now indicates Buffett has lost it and should no longer be trusted for investment advice, it turns just the opposite is true.

Over the last 49 years, Buffett beaten the S&P 500 by staggering amount -- delivering a return of 693,518% compared to 9,841%.

Yet more interesting is the number: 106,701%. This is the difference between the total overall gain of the book value per share of Berkshire Hathaway from 2012 (586,817%) to 2013 (693,518%).

Said differently, while the book value per share of Berkshire Hathaway "only" grew by 18%, it rose from $114,214 to $134,973, a difference of more than $20,000. When you consider the original book value was $19 per share, the gain in book value Berkshire Hathaway delivered in 2013 would've represented a return of more than 1,000 times the original investment to sit at nearly $135,000 today.

By comparison, if the same $19 was invested in the S&P 500, the gain of 32% would've represented a growth of just a little over $450 on an original $19 investment made in 1964. This difference displays the power of compound interest, but it also shows how remarkable Warren Buffett's performance truly is.

Warren Buffett has long extolled the values of buy-and-hold investing, and it can be clearly seen through this example that true investment gains are not made over the course of a few weeks or months, but instead years. That is why Buffett's success shouldn't be evaluated over the relative return of his company over just one or even five years, but instead over decades of investing. 

In his 1988 latter to shareholders Buffett said, "when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever," which reminds us all investing for the long-term is truly when astounding gains can be made.

More wisdom from Warren
While its value is seemingly infinite, the price of Warren Buffett's wisdom is thankfully free. He is one of the greatest investors ever and through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway worth billions. If you want more from Buffett, now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Read/Post Comments (2) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2014, at 4:00 AM, rfischer314 wrote:

    This article is pretty silly. It takes Buffett's ACCUMULATED gains and then applies a 2012/13 percentage. Of COURSE the S&P change will pale compared to BRK if you take the last 50 years as a given (and thus the share price is over $100k vs whatever $19 became with the S&P).

    A true, and better, analysis of BRK ignores things that happened decades ago. The company no longer makes the same types of investments due to size and scale as it did in 1980 and 1990. It's forced to play in the Majors now, even though it's knockout success was in the Minors.

    So stop giving it neverending credit for circumstances that will never apply again. BRK's 5 year performance here INCLUDES the financial crash sweetheart deals. Without those (rare) deals, it'd fall short even more.

    The company is buying Wells now, but failed to when the price was even lower during the panic.

    I love the company, love the stock, but the truth of the matter is that it's not superior TODAY, based on the situation it will forever be in going forward (i.e. extraordinarily huge.)

  • Report this Comment On March 10, 2014, at 4:43 AM, somethingnew wrote:

    It's true that they don't make the same kind of investments that they made years ago and Buffett even noted this at one time pointing out that he had more of an interest in building out his company rather than making a bunch of more profitable investments in cigar butt type stocks. This is where people who quote Buffett today go wrong. The kind of investments that made Buffett who he is today were of some of the most hated stocks ever (Geico, etc). He had every chance to have invested in these kinds of companies in the financial crisis but he chose to play it safe making deals in safer sweetheart bonds where he could have made a whole lot more buying up Hartford or Genworth type stocks or one of the many that existed during that time trading in the single digits which even then would not have been too small for a huge investment company to have bought into. 40 years ago he probably would have too but these days he's not interested. The Buffett of the 1970's was less risk averse and more profit hungry than the Buffett of 2014. Buffett could still choose to make those types of investments if he wanted to and make a lot more money. After all, look what happened to his co-founder Charlie Munger's stock picks for DJCO. Buffett has not lost his skill to make those kinds of massive gains just his desire to. He'd much rather use that focus and delegate it toward building his business and choosing investments occasionally than spending all of his time picking stocks like he did in his early days.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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8/28/2015 4:00 PM
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