The Power of Compounding; or How Good is Warren Buffett's Record Anyway?

Newbie investors often don't realize how much return an outperformance of 4% or 5% produces in the long run. Compounding is so powerful that, over a long period of time, the outperformance will be massive.

To illustrate, consider the returns of, arguably, the best investor of all time, Warren Buffett, versus the market (say, S&P 500). Warren Buffett has produced around 20% annual return whereas the market has returned around 10% per year (rough numbers, off the top-of-my-head). This is only a 10% outperformance but given how Buffett has outperformed for more than 40 years, the results are staggering.

Let me quote Jeff Matthews, from his well-written overview of the 2013 Berkshire Hathaway Shareholder Meeting. If you want a perceptive recap of the annual meeting, I recommend reading the entire blog post ("“We Want to Win”: The Berkshire Hathaway Annual Meeting, 2013 Edition").
...Berkshire’s stock is at a new all-time high—$162,904 per share for the A shares on the close Friday.

And considering that those same “A” shares were trading at $16 the day Buffett took control on May 10, 1965, well, it’s no surprise the crowd is feeling upbeat.

How Good Is Warren Buffett’s Track Record, Really?

But how good is Warren Buffett’s track record, really?

Well, Berkshire’s stock has appreciated—this is appreciation only, no dividends, mind you—981,150% since May 10, 1965.

And if you’d put $16 into the S&P 500 instead of into one share of Berkshire on that same day, your share of the S&P 500 wouldn’t be worth $162,905 today from appreciation (we’re leaving out the dividends for now.)

In fact, your S&P 500 share wouldn’t be worth $100,000 today.

It wouldn’t even be worth $10,000 today.

It would be worth about $600.

Throw in dividends and you’re north of $1,000 but south of $2,000 on your $16 investment. The Berkshire shareholder has $162,904.

That’s how good Warren Buffet’s track record really is.
Think about that! Just an outperformance of around 10% has resulted in approx. $160,000 vs $2000!


  1. Actually the math is wrong: Berkshire never paid dividends after Buffett took over, they were retained and reinvested. The true comparison would be buying $16 of S&P on May 10th, 1965 and continually reinvesting the proceeds. Wouldn't come anywhere close to Buffett either, but it would narrow the gap in relative terms quite a bit (probably cut it to a third, I would guess).

  2. The author does point out that if you include dividends the returns would probably be between $1000 and $2000, whereas it is around $600 if you just look at price gains. So the S&P500 returns would be around 3x the price gains if you include dividends. Reinvesting would increase it a bit more but probably not by much.

    It still won't narrow the gap much because reinvesting dividends will end up buying the S&P500 at market price. If the market is overvalued, you will reinvest at above-intrinsic-value.

  3. The outperformance percentage seems wrong, it is 100%, not 10%. Assume a principle of $100, the common return of investment of the market is 10%, while those for Berkshire Hathaway is 20%, then it means the other investor earns $10 while Berkshire Hathaway earns $20. The earning of Berkshire Hathaway is double of that of other investor, a 100% outperformance.


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