2014: Is 5-year performance versus the index still a valid yardstick of management's performance?

BECKY QUICK: This question is from Manolo Salseda (PH).

And I’ll preface it by saying he says that he is “a true admirer of Buffett and what he stands for, so please don’t confuse my bluntness and straightforwardness with a lack of admiration or empathy with this amazing person and his master creation.” With that disclaimer —

WARREN BUFFETT: “But.” (Laughter)

BECKY QUICK: But. His question is, “You’ve stated several times in the past that if management, you, wasn’t capable of delivering a better return than the index, than management wasn’t doing the job.

“Then you said that the yardstick should be any five-year period. You’ve just missed your five-year period comparison.

“How come you didn’t tackle the issue in your annual shareholder letter? Are you changing the yardstick, and what’s next?”

WARREN BUFFETT: No, we’re not changing the yardstick.

But I would point out that we said, actually, in the 2012 report — and it’s in the upper half of the first page — we pointed out how we do worse in very strong years and better in poor years.

And I said then, “If the market continues to advance in 2013, our streak of five-year wins will end.”

I didn’t say it might end, or could end, or anything. It was obvious that if you have five strong years in a row, we will not beat the S&P. And that will be true in the future, for sure.

And of course, last year was — I think there were two years in the last 40 or so that the market was up more than it was last year. So, despite the things mentioned about President Obama, the stock market seems to have done quite well.

We will underperform in very strong up years. We’ll probably, more or less, match in moderate up years. We’ll do better than average in even years or down years.

And I have said, and I’ll continue to say, and it’s been true that over any cycle, we will — I think we will overperform. But there’s no guarantee on that.

But it was clearly said — like I say, on the first page of the 2012 report — that if the market went up, we would have a five-year streak of underperformance. And that’s exactly what happened.

Charlie?

CHARLIE MUNGER: Well, we should remember that Warren’s standard talks about net worth of Berkshire increasing, after full corporate taxes, at roughly 35 percent. And the indexes aren’t paying any taxes.

And so, Warren has set a ridiculously tough standard and has so far met it over a long period of time.

In the last couple of years, the net worth of Berkshire, after full corporation income taxes, went up, what, 60?

WARREN BUFFETT: Something like that, yeah —

CHARLIE MUNGER: $60 billion —

WARREN BUFFETT: Yeah. Pre-tax, probably 90 billion in —

CHARLIE MUNGER: Yeah. And so, if this is failure, I want more of it. (Laughter and applause)