Warren Buffett, often dubbed the Oracle of Omaha, is a legendary figure in the world of investing. For decades, he has been hailed as one of the greatest investors of all time. However, a closer look at his investment journey reveals a startling truth that applies not only to him but to virtually every successful fund manager: they all peak early and then experience a decline in their out-performance. In this article, we will explore why even Warren Buffett lost his edge roughly 20 years ago and how this phenomenon is an undeniable reality for all fund managers.

The Early Brilliance of Warren Buffett

Warren Buffett's journey as an investor began in 1956 when he invested just $100 of his own money in his first fund. Over the years, he transformed that initial investment into an astonishing $120 billion, primarily through his investment vehicle, Berkshire Hathaway. His ability to consistently outperform the market was nothing short of remarkable, beating the S&P 500 total return index by an astounding 10% per annum over 58 years.

The Peak and the Decline

While Warren Buffett's early years as an investor were characterised by incredible success, the data tells a different story when examined over time. In fact, Buffett peaked in the very first year at Berkshire Hathaway, outperforming the market by an impressive +37% in 1965. However, this marked the peak of his annualised cumulative value addition. Subsequent years saw fluctuations, but the overall trend was a gradual decline in his out-performance.

By the end of the 1960s, Buffett's annualised cumulative value add had decreased to +27% per annum. This trend continued into the subsequent decades, with annualised cumulative value adds of +19.7% in the 1970s, +20.4% in the 1980s, +15.1% in the 1990s, and +13.1% in the 2000s. Today, the annualised cumulative value add stands at 'just' 10% per annum.

The Illusion of 'Since Inception' Returns

One of the reasons why fund managers' performance decline often goes unnoticed is the focus on 'since inception' returns. These returns can be misleading because they mask the consistent decline in performance over time. Investors may be enticed by the fact that a fund has maintained a 10% annual return for 58 years, but they fail to recognise that this number has been steadily decreasing.

Market Cycles and Buffett's Strategy

Buffett's investment strategy, often characterised as 'value investing,' is known for lagging the market during bull markets while outperforming during bear markets. This strategy led to underperformance during the dot-com boom of the 1990s but paid off when the tech bubble burst in the early 2000s. However, in recent years, Buffett's value investing approach has struggled to keep up with rapidly changing market dynamics.

Reasons for the Decline

The decline in Warren Buffett's out-performance is not due to personal shortcomings but rather attributable to two key factors:

1. Berkshire Hathaway has become too large to deploy capital effectively without significantly impacting markets.
2. The company has accumulated a substantial cash position, a result of the challenges in deploying capital efficiently.

The story of Warren Buffett's diminishing out-performance serves as a stark reminder that even the most brilliant investors are not immune to the inevitable decline in their ability to consistently beat the market. This phenomenon extends beyond Buffett to virtually all successful fund managers. Investors should approach 'since inception' returns with caution and be aware of the long-term trends in fund performance. The journey of Warren Buffett, while extraordinary, also demonstrates the importance of adaptability and staying attuned to changing market dynamics in the world of investing.

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