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Warren Buffett’s Awesome Feat at Berkshire Hathaway, Revisited

Warren E. Buffett at a 2013 shareholders’ meeting in Omaha. Despite some recent slowing, shares have gained 1,826,163 percent since 1965. Daniel Acker/Bloomberg, via Getty Images 
Warren Buffett is taking a victory lap, and on the 50th anniversary of his reign at Berkshire Hathaway he is entitled to it. From a failing New England textile company, Berkshire became the vehicle for one of capitalism’s greatest investing feats.
Mr. Buffett is one of the world’s richest men — and he has made his shareholders an astounding amount of money. How much, exactly? He cast a spotlight on that question in his annual letter to shareholders, issued on Feb. 28. In a break with tradition, the letter included a table on its second page that enumerates the market return of Berkshire shares, year by year.
Until now, he has favored another method for measuring success: the change in the book value of the shares. That’s an accounting metric. It is, basically, net assets, and he has said it is better than Berkshire’s transitory market price at tracking the company’s true worth.
However you analyze it, Berkshire’s long-term performance has been awesome. Using market value, he says, its shares gained 21.6 percent annually compared with 19.4 percent for book value and 9.9 percent for the Standard & Poor’s 500-stock index, with dividends. Using market returns, the shares gained a cumulative 1,826,163 percent since he took control.
Consider that at the end of 2014, an investment of $100 in the 1965 Berkshire shares would be worth $1,826,163. For the same period, $100 in the index, with dividends, would have grown to $11,196. That’s not shabby. But it’s a lot less than the Berkshire investment — $1,814,967 less.
So it may seem churlish to quibble. But it’s worth raising some questions, if only because Mr. Buffett has invited them. Performance is critical. He says that if he doesn’t outperform the market, investors shouldn’t trust him with their money.
Until this year, he has invoked book value: Page 2 of his letter would include the book value return, the S.&P. return and a third column, “relative results,” which showed how he was doing in comparison with the index. Now that comparison is gone. If that column existed in the current report, it would show that he trailed the S.&.P. again, using book value.
In fact, counting 2014, Mr. Buffett has underperformed the S.&P. 500, using book value, in five of the last six years. That hasn’t happened before. His 2010 letter to shareholders showed Berkshire’s returns over five-year rolling periods. In every single such period until then, he had outperformed the S.&.P., using book value.
By shifting to the market value metric — for the first time in 50 years — his returns look better. Would he have added a table on his golden anniversary showing market value if it had been a bad year for Berkshire in the stock market, whose judgment he has often disdained? I don’t know. Mr. Buffett declined to comment.
In the current letter, Mr. Buffett says that book value and intrinsic value — his estimate of the true value of the company, which he will not publicly reveal — have diverged since Berkshire’s early years. (Intrinsic value, which is at the core of his investing, represents “the discounted value of the cash that can be taken out of a business during its remaining life,” in his words. That calculation is subjective, depending on judgments about factors like a business’s prospects, its management’s ability now and in the future, and the likely path of interest rates and the economy.)
In that letter, he says: “Our emphasis has shifted in a major way to owning and operating large businesses. Many of these are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how much the value of these companies has increased. Consequently, the gap between Berkshire’s intrinsic value and its book value has materially widened.”
That makes sense. Berkshire’s subsidiaries, like See’s Candies, Geico, the Burlington Northern Santa Fe Railway and Berkshire Hathaway Energy Company, are being carried on Berkshire’s books at a fraction of their real value, he says. On the other hand, retained earnings from those companies, which are reinvested, do, in large part, show up elsewhere in the ledger. That’s why, over the long run, he has said, book value is a worthwhile metric.
His long-term performance is remarkable, using book value, too. He has handily beaten the market over a long career. Still, in a column last year, relying primarily on a rigorous statistical analysis by Salil Mehta, a statistician, author and blogger, I pointed out that Mr. Buffett’s market-beating heroics had dimmed. Last week Mr. Mehta did preliminary crunching of the new numbers. He still found that Mr. Buffett’s performance had declined.
“The new numbers don’t change my probability analysis,” Mr. Mehta said. “Warren Buffett has been an extraordinary investor. But he hasn’t been doing as well recently.”
Mr. Mehta’s calculations show that over his first 25 years at Berkshire, Mr. Buffett’s average annual return was 24 percent using book value and 30 percent using market value, compared with 10 percent for the S.&P. 500. Over his second 25 years, his performance was still outstanding: 15 percent for book value, 14 percent for market value and 10 percent for the index. The last six years reveal a different picture: 13 percent for book value, 15 percent for market value and 17 percent for the index. That’s no disaster, but Mr. Buffett didn’t meet his own standard: He frequently underperformed the market.
There’s no shame in that. Virtually everyone underperforms the market sometimes. To outperform it consistently, as Mr. Buffett has done over most of his career, is exceedingly rare. That’s worth celebrating, even if it’s also worth asking why the recent years haven’t been extraordinary.
A version of this article appears in print on March 8, 2015, on page BU3 of the New York edition with the headline: Buffett’s Awesome Feat, Revisited. Order Reprints|  Today's Paper|Subscribe