MEBISODE: Even Berkshire Underperformed
Episode
14 min
Read time
2 min
Topics
Investing, Fundraising & VC, Sales & Revenue
AI-Generated Summary
Key Takeaways
- ✓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.
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.
Notable Moment
Berkshire Hathaway's track record is so strong that even a hypothetical 99% price collapse from its 1965 starting point would still leave investors ahead of the S&P 500—a figure that reframes what long-term compounding actually means.
Episode Transcript
Welcome to the MedPhavers Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here. Matt Faber is the cofounder and chief investment officer at Cambria Investment Management. For more information, visit cambriainvestments.com. What's up, everybody? It's time for another Mephistode. Let's not waste any time and jump right in. Beyond the usual market volatility and geopolitical noise, 2025 marked a historic milestone. The retirement of Warren Buffett, arguably the greatest investor of all time. Imagine if you had invested in Berkshire Hathaway stock back when Warren took over. $10,000 invested in 1965 would have grown to over $600,000,000 through year end 2025. Amazing. Our favorite statistic, courtesy of Chris Bloemstraan, another podcast alum, is that Berkshire Hathaway stock could decline by 99% and still outperform the S and P 500 since inception. Now many of us were not alive back in 1965, and even if we were, we may not have had the confidence in a young Warren. However, most people understood that Buffett was an amazing investor after ten or twenty years of stellar returns. Unfortunately, after watching Buffett post two decades of those killer returns, those same spectators may have been fearful that they may have missed the boat. Maybe they were too late. Many investors wait and wait and wait for that magical pullback in performance that often never occurs. Or maybe when you do get that pullback and the star managers hit that rough patch, investors often hit the pause button on their buy orders or, worse, run for the exits instead of backing up the truck to invest. Think back twenty five years ago to the turn of the millennia, 1999. Berkshire stock had been stomping The US market as usual, but along came the .com stocks. Berkshire underperformed the S and P 500 by 40 percentage points in 1999. Berkshire stock was down around 20%, while the stock market overall was up about 20%. Barron's magazine even ran a cover story titled, what's wrong, Warren, with this famous opening line. After more than thirty years of unrivaled investment success, Warren Buffett may be losing his magic touch. While it seems logical with hindsight that investors should have loaded the boat to buy Berkshire, the opposite occurred. They were fearful that the old man's time had passed him by. We all know what happened next, of course. The S and P was flat for a decade while Berkshire more than doubled. You may be thinking at this point, what does this have to do with me? We believe there's an ETF worthy of your consideration, one that is a strong long term track record placing it in the top decile versus its MorningStar category over both ten year and since inception periods, but has struggled recently, placing it in the bottom 11% versus category in …
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“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.”
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“Meb Faber uses Warren Buffett's 1999 Berkshire underperformance... Berkshire Hathaway's track record is so strong that even a hypothetical 99% price collapse from its 1965 starting point would still leave investors ahead of the S&P 500.”
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