MEBISODE: Even Berkshire Underperformed

What It Covers

Meb Faber uses Warren Buffett's 1999 Berkshire underperformance and Cambria's SYLD ETF recent two-year lag to argue that short-term underperformance is a predictable feature of sound long-term investment strategies, not evidence of failure.

Key Questions Answered

• •Time horizon and randomness: Vanguard research across 2,085 active funds found that 95% of surviving outperformers still underperformed in at least five individual years—roughly one-third of the time. Shorter evaluation windows amplify luck over skill, producing false conclusions about strategy quality.
• •Rolling returns over calendar years: SYLD outperformed its Morningstar mid-cap value category on one-year rolling windows 64% of the time, but outperformed on every single five-year and ten-year rolling observation since inception—demonstrating how extending the measurement horizon filters out noise and reveals durable edge.
• •Valuation as a forward-looking signal: SYLD's price-to-earnings ratio stands at 12.52 versus 17.86 for its Morningstar category and 27.61 for the S&P 500. Across price-to-book, price-to-sales, and price-to-free-cash-flow, SYLD ranks cheapest, suggesting valuation supports long-term return potential.
• •Behavioral discipline during drawdowns: Berkshire underperformed the S&P 500 by 40 percentage points in 1999, prompting Barron's to question Buffett's ability. Investors who sold missed a decade where Berkshire doubled while the S&P returned nothing—making capitulation at rough patches historically costly.