Warren Buffett vs S&P500 – is he losing his way?

For decades, Warren Buffett’s Berkshire Hathaway has beaten the S&P500, hands down.

That has changed in recent times as the graph below shows:

Source Atlas

This article will discuss the main reasons for this change in recent times.

  1. First – the issue of scale.

Buffett himself has admitted that it is now tough for him to beat the S&P given the size of Berkshire Hathaway.

One reason is how big the company now is. It is much harder to get 10% on a large company, than 25% on a smaller company – which Berkshire Hathaway was in the 1960s.

2. Who is he competing against?

In the 1960s and 1970s, most of the investors in the market were individuals. Teachers, doctors, lawyers, the milkman and others.

Individual investors would often buy on emotion, and still do. So you could more easily find bargains.

These days, however, most of the S&P500 players are institutional ones – banks, hedge funds and other firms.

As the graph below shows, they now make up over 80% of the money in the S&P500:

Most markets are now dominated by firms and not individual investors

What does this mean for the average investor?

You are unlikely to beat the S&P500 by picking stocks you “like” or “have researched”.

There are millions of companies out there, researching the same data you and I have.

If you want to actually have a chance to beat the market, you are likely going to have to:

  • Focus slightly more on small caps
  • Use a percentage of your portfolio to invest in higher risk investments that aren’t public listed – private equity for example.

Further reading

Do most people overestimate how smart they really are?

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