Buffett to Berkshire Shareholders: Be Prepared to Lose Half Your Money

By: Dan Caplinger

Few investors can match the track record of investing performance that Warren Buffett has achieved, and longtime shareholders of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) know firsthand how successful long-term investing can result in life-changing wealth. Yet the Oracle of Omaha has gone through both good times and bad, and rather than giving into the prevailing attitude among market participants that the nine-year-old bull market could continue indefinitely, Buffett’s latest annual letter to shareholders warns Berkshire investors that losses of 50% or more are not only possible, but inevitable in the future.

The ups and downs of Berkshire stock:

Buffett would be the first to tell you that Berkshire has seen extraordinary returns over time. Between 1965 and 2017, the company has grown its book value at a 19% average annual rate, and that has translated into share-price gains of nearly 21% per year on average. That market gain is more than double the roughly 10% average annual return of the S&P 500 over the same period.

Yet when you look more closely at short-term movements of stocks, they don’t move straight upward nearly as predictably. As Buffett describes it, “Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value.” The result is short-term price randomness for stocks, and investors can have no confidence that the price of a stock in the market will bear any connection to its intrinsic value at any given time.

IMAGE SOURCE: THE MOTLEY FOOL.

That’s even true for Berkshire Hathaway stock. Despite its large gains for long-term shareholders, the company has seen several spans of time during which Berkshire performed terribly on an absolute basis. Some of the worst periods include the following:

Period Loss in Berkshire Stock
March 1973 to January 1975 59.1%
Oct. 2-27, 1987 37.1%
June 1998 to March 2000 48.9%
Sept. 2008 to March 2009 50.7%