VALUE: After Hours (S08 E14): Warren Buffett’s Greatest Achievement: The Math Behind Berkshire Hathaway’s Returns

During their recent episode, Taylor, Carlisle, and Chris Bloomstran discussed Warren Buffett’s Greatest Achievement: The Math Behind Berkshire Hathaway’s Returns. Here’s an excerpt from the episode:

[Chris] That was my 180-page letter. 90 or 100 was Berkshire, and I do have a tribute. So I won’t get into the math, but I’ll leave it.

I mean, he was the best investor of all time, but he was also the best operator in terms of running a business with morality and ethics and executive compensation, and he was just such a great mentor to all of us in terms of how to behave with honour. It’s something you don’t see in a lot of places, but the performance track record, which is just a component of it, I’ve got a section starting on, I don’t know, page 95 of the letter, and I had that, I had the, I told Warren in a note a few years ago that I did the math, just a quick simple algebra that Berkshire could lose 99%, 99.3% of its market cap and share price and still outperform the S&P 500 since he got control of Berkshire in 1965.

And he said, wow, that’s, Ben Graham would be proud. That’s a testament to compound interest. And so I mentioned that to Charlie a couple months later at the Wesco meeting, and he said, Chris, this is, it’s just compound interest.

That’s nothing special. And so I just went. This is basic math.

I’ve got it, I’ve got it. So in doing my long-term compounding against the Ibbotson, it dawned on me, well, I’ll just tell, if it, I’ll take 30 seconds. So what one day in the history of the U.S. stock market, one, what single moment would be the best time to buy the stock market via the S&P 500? I guess like the 29 low? The 32 low. The 32 low.

June 1 of 32, the S&P had fallen 86%. The Dow had fallen by a little bit later in July, 89%. So if you bought the S&P 500 on an 86% decline and owned it through today, you’ve compounded at 12.2%, which is way better than the Ibbotson 10 1⁄2. And had you bought the peak in 1929, you compounded at something like nine. Well, over a century, that’s huge. Instead, had you bought the S&P 500 at the low, the absolute day of the low, and held it until September 30, 1964, which was the end of Berkshire Hathaway’s 1964 fiscal year, and been willing to lose 99% of your money and put all your remaining money, so $100 from the low in 1932 to 1964 compounded at 15 1⁄2%, from $100 invested to $10,000.

You could go back from $10,000 to 100 by Berkshire and still have outperformed with Berkshire. So you essentially sit on cash for 33 years, 32 1⁄2 years, earning absolutely nothing, and then by Berkshire. And in a third of a century shorter, compound $100 in Berkshire’s case to 6.1 million, where the S&P 500 from 1932 grew to $4 1⁄2 million. Where it only grew to $45,000, the S&P being it from 1965. So essentially, you could lose 99% twice in Berkshire’s case and still have beat the market. I think Charlie would have been impressed with that, with that figure, even though it’s simple mathematics, compound interest.

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VALUE: After Hours (S08 E14): Warren Buffett’s Greatest Achievement: The Math Behind Berkshire Hathaway’s Returns

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