Why Warren Buffett has done more to educate investors than any other corporate executive

By Philip van Doorn

As Buffett lands on the MarketWatch 50 list of the most influential people in markets, his biggest legacy may be how he's schooled others about investing.

Warren Buffett, the CEO of Berkshire Hathaway, is world famous and a closely watched market force. Berkshire is a big shareholder of Apple, one of the seven big tech companies that currently dominate the U.S. stock market. It also recently made big bets on Japanese trading companies, just as the Japanese stock market roared back to life, and Occidental Petroleum, helping to popularize a new financial model for U.S. shale producers.

But Buffett is also exceptionally candid when communicating with investors. Nobody has done more to explain how the nuts and bolts of various large businesses work, or don't work. Buffett's management style has been an outstanding success for decades and yet he doesn't shy away from talking about his less successful business ventures and the mistakes he has made.

Buffett lands on The MarketWatch 50 list of the most influential people in markets. The list is composed of people whose actions move the prices of stocks and bonds, but also includes people who influence the behavior and strategies of market participants. Buffett does both. And at age 93, Buffett's biggest legacy may be how he has schooled others about investing.

Every year, of course, Buffett leads Berkshire Hathaway's annual meeting in Omaha, Neb., typically on the first Saturday in May. The meetings are widely covered in the media. His company's annual report and Buffett's letter to shareholders are other examples of how Buffett shares information with investors and teaches them important concepts that can be widely applied.

Berkshire Hathaway is a conglomerate, with insurance and reinsurance operations at its core, but it also owns a railroad, utilities and other subsidiaries, along with a portfolio of investments in other companies. It has been an incredible platform for Buffett to educate investors.

Stock performance

Since 2001, Buffett has started his letters with comparisons of annual total returns for Berkshire Hathaway's stock and the S&P 500 SPX, with dividends reinvested.

But any one year is an arbitrary period. If we look at longer returns, the numbers are also interesting.

For example, Berkshire Hathaway's Class B shares (BRK.B) returned 83% for five years through 2021. Not bad, but during the same period, the S&P 500 returned 133%, as the giant technology stocks that make up a large portion of the index soared. Toward the end of that run, it was not unusual to find opinion pieces in the financial news indicating that maybe Buffett's value-oriented investment style was past its time, or that recent mistakes had taken too much of a toll.

But if you took another five-year lookback at the end of 2022, you would have seen a different type of result:

Yes, Berkshire underperformed the benchmark index slightly, but it was a smoother ride. When the S&P 500 dropped 18.1% in 2022, as big tech led a downward move for stocks as interest rates shot up, Berkshire's stock returned 4%.

That sort of performance makes it easier for an investor to resist the temptation to sell into a declining market. Trying to time the market by moving to the sideline typically ends with the investor coming back too late and missing out on a major part of the stock market recovery. A market-timing effort is likely to lower total returns over time.

Before looking at stock performance further, we need to point out that Berkshire Hathaway has two common share classes. The Class A shares (BRK.A) closed at $533,815 on Nov. 3. These shares have never been split, which is something companies do if a share price gets high enough that many investors won't be able to invest in them. High share prices can also keep stocks from being included in some stock indexes. For this reason and to keep voting rights concentrated among Class A shareholders, Berkshire Hathaway created its Class B shares in 1996, and the Class B shares were split 50-to-1 in January 2010. The Class B shares closed at $351.81 on Nov. 3. Each class B share has rights to dividends and other distributions to the amount of one fifteen-hundredth of a Class A share, and voting rights equal to one ten thousandth of that of a Class A share.

Here is a comparison of total returns for various periods through Nov. 3 for Berkshire and the S&P 500:

     3 Years  5 Years  10 Years  15 Years  20 Years  25 Years  30 Years 
   Berkshire Hathaway Inc. Class A        72%      73%      208%      354%      576%      696%     2972% 
   Berkshire Hathaway Inc. Class B        70%      70%      205%      356%      569%      687%       N/A 
   S&P 500                                36%      74%      199%      509%      511%      511%      511% 
                                                                                         Source: FactSet 

And here is a look at average annual returns for the same periods:

     3 Years  5 Years  10 Years  15 Years  20 Years  25 Years  30 Years 
   Berkshire Hathaway Inc. Class A      19.8%    11.6%     11.9%     10.6%     10.0%      8.6%     12.1% 
   Berkshire Hathaway Inc. Class B      19.4%    11.2%     11.8%     10.6%     10.0%      8.6%       N/A 
   S&P 500                              10.7%    11.8%     11.6%     12.8%      9.5%      7.6%      9.9% 
                                                                                         Source: FactSet 

Berkshire's outperformance for three years reflects how well it held up during the broad market decline in 2022. As we look at longer periods, Berkshire shines. And if you look at the total return figures for Berkshire and the S&P 500 in the 2022 shareholder letter, you will see an average annual return from 1965 through 2022 of 19.8% for Berkshire's Class A stock, against a 9.9% average for the S&P 500.

And that brings us to our first example of Buffett's honesty combined with a desire to treat investors with respect through an effort to educate them.

What investors should expect

In his annual letter to shareholders for 2016, Buffett wrote that he and his longtime partner, Charlie Munger, expected Berkshire's "normalized earnings power per share to increase every year." (All italics in this article are Buffett's.) The company can suffer losses from catastrophes in its insurance or reinsurance business in any year, and earnings can decline for other reasons, such as an economic slowdown.

In the same letter, Buffett wrote, "Our expectation is that investment gains will continue to be substantial -- though totally random as to timing..."

That is an important lesson. When you buy companies outright or become a shareholder in other companies (Berkshire does both), you cannot expect the investments to gain value in a steady, orderly fashion.

Diversification, index funds and the importance of minimizing management fees

In the 1993 letter, Buffett had this to say about the importance of having a diversified portfolio of investments. An investor "who does not understand the economics of specific businesses [but] nevertheless believes it in his interest to be a long-term owner of American industry... should both own a large number of equities and space out his purchases."

Then he added this fascinating comment: "By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." This lesson serves investors without necessarily doing anything to encourage them to buy shares of Berkshire Hathaway.

In the 2017 letter, Buffett described the result of a bet he made in 2007, that a group of five "funds of funds" selected by Ted Seides, who was a co-manager of Protégé Partners, an investment advisory firm, wouldn't be able to beat the performance of the S&P 500 over a 10-year period. It may not surprise you that the low-cost index fund performed much better than any of the five funds-of-funds that were chosen. Buffett explained how highly motivated those fund managers were, especially when it came to fees.

"Even if the funds lost money for their investors during the decade, their managers could grow very rich. That would occur because fixed fees averaging a staggering 2 1202% of assets or so were paid every year by the fund-of-funds' investors," he wrote.

And in the same letter: "Performance comes, performance goes. Fees never falter."

Going back to the 2016 letter, Buffett wrote: "Human behavior won't change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something 'extra' in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: 'When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.'"

"Charlie and I are not stock-pickers; we are business-pickers."

Buffett wrote the above in the 2022 letter, adding that his job and Munger's was to manage the savings of their shareholders by purchasing entire companies and shares of other companies to become passive co-owners of other businesses. They want both types of businesses to have "long-lasting favorable economic characteristics and trustworthy managers."

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