Some people believe Warren Buffett has lost his edge.
Berkshire Hathaway's (NYSE:BRK-B)(NYSE:BRK-A) book value growth has actually lagged the total return of the S&P in four of the past five years. Before you start saying that Berkshire's best days are behind it, consider the reasons why this simply doesn't matter.
It's not about the good years
Don't focus on the fact Berkshire has been outpaced by the S&P for four of the past five years. What people should be focusing on is how Buffett and team perform when the market is down, because that is the true key to the company's success.
For example, in 2008 the S&P was down 37%, while Berkshire only lost 9.6% of its book value. The next year, the S&P gained 27%, compared with just 20% for Berkshire. In 2010 as well, the S&P outperformed with a gain of 15% vs. 13%.
However, if we had invested $10,000 in both Berkshire's book value and an S&P index fund at the beginning of 2008 the Berkshire investment would be worth more than $12,200 in 2010, while our S&P investment would be worth just under $9,200. So even though the S&P outperformed Berkshire two out of three years around the financial crisis, Berkshire's total return for the period was 22%, while the S&P's return was -8%. This is why the performance during bad years matters more.
Over the past 50 years the S&P has had 11 losing years. Berkshire, on the other hand, saw just two!
What really happens when the market rises quickly
As a general rule of thumb, when the market rises quickly, riskier stocks are generally among the best performers.
Well, Warren Buffett doesn't buy risky stocks. He wants stocks that are going to deliver consistently good performance, year in and year out, no matter what's going on in the world. As he said in regards to his two major purchases in 2013 (NV Energy and a major interest in Heinz), "Both companies fit us well and will be prospering a century from now."
The company also actively looks for opportunities to raise its stake in businesses that it already invests in, and just this year bought more shares in Wells Fargo (Berkshire now has a 9% stake) and IBM (6%) as both stocks were significantly undervalued in Berkshire's eyes.
The best investing lesson of Warren Buffett
In short, don't worry about any individual year's performance too much. As long as your investments provide you with growth and consistency, and you think they'll still be around and thriving in 100 years, you'll be fine. Look at the types of businesses Buffett invests in. People will always need banks, energy, insurance, and ketchup!
What happened when the financial crisis hit? Buffett invested in banks, because he knew that no matter how tough times got, people would still need banking services many years from now. Where most people saw crisis, he saw opportunity.
When it comes to investing, slow and steady almost always wins the race. A few short-term home runs will never compare to a lifetime of base hits, and this is the one concept of investing that Buffett understands and has implemented better than anyone else.