MEBISODE: Even Berkshire Underperformed

Episode Summary

Executive Summary: The episode argues that investors should judge strategies over long horizons, not short-term slumps, using Berkshire Hathaway’s history and Cambria’s SYLD ETF as examples. It shows that even elite managers endure extended underperformance, while SYLD’s long-term rolling returns and relatively cheap valuation may indicate a durable edge rather than a broken process.

Main Topics: Buffett/Berkshire as a long-term investing case study (Priority: 5/5): The show uses Warren Buffett’s career and Berkshire Hathaway’s extraordinary compounding to illustrate how great strategies can look wrong for long stretches before proving themselves. Why short-term performance judgments are misleading (Priority: 5/5): The episode emphasizes that investors often evaluate funds over too-short periods, letting recent underperformance or randomness drive bad decisions. SYLD ETF underperformance and investor sentiment (Priority: 5/5): Cambria’s Shareholder Yield ETF (SYLD) is presented as a current example of a strong long-term strategy experiencing a rough patch and outflows. Rolling returns as a better evaluation tool (Priority: 4/5): The discussion argues that rolling 1-, 5-, and 10-year returns provide a more reliable view of durability than calendar-year results alone. Valuation as a source of future return potential (Priority: 4/5): The episode highlights SYLD’s relatively cheap valuation versus its Morningstar category and the S&P 500 as a supportive factor for long-term expected returns. Investor discipline during drawdowns (Priority: 4/5): The central behavioral lesson is that discomfort and temporary underperformance are often the ‘cost of admission’ for long-term investing success.

Key Arguments: Great investments can underperform for multiple years without their underlying process being broken; the key is distinguishing temporary headwinds from permanent impairment. Short holding periods amplify randomness and can create false conclusions about a strategy’s quality. Even Berkshire Hathaway, one of the greatest investments ever, had many calendar years of underperformance versus the S&P 500. SYLD’s long-term record is strong despite recent weakness: it has outperformed its category in most full years since inception and in all observed 5- and 10-year rolling windows once enough data exists. Rolling return analysis is superior to single-year snapshots because it measures outcomes across many entry points and better reflects investor experience. Lower relative valuation may improve SYLD’s long-term return prospects, even if it does not explain short-term price action. Patience and discipline are essential because many successful strategies look poor before they look brilliant.

Data Points: Berkshire Hathaway growth from 1965 investment: $10,000 grew to over $600 million by year-end 2025 - Illustrates Warren Buffett’s long-term compounding record Berkshire can still lag and beat benchmark: Could decline 99% and still outperform the S&P 500 since inception - Used as a dramatic comparison of compounding advantage Berkshire underperformance in 1999: Underperformed the S&P 500 by 40 percentage points - Example of a severe but temporary rough patch Berkshire 1999 return gap: Berkshire down around 20% while the market was up about 20% - Shows how bad relative performance can look in a given year SYLD full years since inception: 12 full years - Time span used in the fund’s performance review SYLD outperformance years: 8 of 12 full years - Calendar-year record versus Morningstar category One-year rolling outperformance: ~64% of the time - SYLD versus its category on a quarterly rolling one-year basis 5-year rolling outperformance: 100% of quarterly observations once sufficient data existed - SYLD versus its category 10-year rolling outperformance: 100% of quarterly observations once sufficient data existed - SYLD versus its category Active funds study sample size: 2,085 funds - Vanguard paper cited on active management success Active funds surviving and outperforming: 552 funds, or 26% - Funds that survived and outperformed from 2000 to 2014 Five-year underperformance frequency among survivors: ~95% - Roughly 95% underperformed in at least five years Seven-year underperformance frequency among survivors: ~60% - About 60% underperformed in at least seven years SYLD relative category rank in 2025: Bottom 11% - Indicates recent weak performance versus category SYLD long-term relative rank: Top decile over 10-year and since-inception periods - Highlights strong historical standing SYLD valuation: P/E: 12.52 - End-2025 valuation versus category and S&P 500 Morningstar Mid-Cap Value category P/E: 17.86 - Comparison point for SYLD valuation S&P 500 P/E: 27.61 - Comparison point for SYLD valuation First two-year underperformance streak: 2024 and 2025 - SYLD’s first consecutive two-year underperformance since inception

Pivotal Quotes: "It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait." — Charlie Munger (quoted by host): Used to support the case for long-term patience during underperformance "People are crazy when they try and draw inferences that they do from three or five or even ten years on an asset class or any actively managed fund." — Ken French (quoted by host): Supports the argument that short performance windows are unreliable "Short-term underperformance is not necessarily a flaw. In many cases, it can be a feature, a cost of admission for long-term opportunity." — Host: Summarizes the episode’s central investing lesson

Implications: Listeners are urged to evaluate strategies over multi-year, rolling horizons and not abandon them during normal drawdowns. For long-term allocators, SYLD’s cheap valuation and historical durability may justify patience rather than panic.