When it comes to equities, there is no hiding from the voting machine

There were several reasons for this poor performance. The late 1990s were marked by a technology bubble. Warren Buffett was clear that Berkshire would not invest in technology companies because he didn’t understand them. This led to some questioning his ability to keep up with the times[2]. Interest rates were also rising and the global economy was experiencing a downturn, with a number of countries experiencing financial crises.

And some of Berkshire’s investments were not performing. In Berkshire’s 1999 annual report, Buffet noted “What most hurt us during the year was the inferior performance of Berkshire's equity portfolio ... Several of our largest investees badly lagged the market in 1999 because they've had disappointing operating results.”[3] This was despite Buffet’s investments being generally large companies that he felt had an enduring competitive advantage.

Despite having already established a very successful track record, Buffet’s aversion to trying to understand tech companies combined with poor performance significantly dented investor confidence and many sold. However, those who didn’t sell Berkshire shares were handsomely rewarded. In the 12 month period following Berkshire’s March 2000 month low, Berkshire was up 72%. Berkshire then continued on to outperform the S&P500 over the long run.[4]

The lesson from this is that is that in the short run there is no hiding from the voting machine. Even a sound, value oriented, risk averse investor can have periods of significant negative performance if the votes go against their investments. But this short-term volatility is the price you pay for the superior performance over the longer run. Patience in equity markets historically has been ultimately rewarded.