Warren Buffett’s career at Berkshire Hathaway shows both extraordinary long-term success and a structural limit: market-beating returns tend to erode as assets and attention grow. This article examines how decades of exceptional alpha gradually moved toward parity with the S&P 500, explores the forces—scale, inflows, and market efficiency—that drive that shift, and draws practical lessons for individual investors.
“Buffett’s Rise and the Shift in Performance”
Buffett produced extraordinary returns for early Berkshire Hathaway investors, especially through the 1960s and 1970s. By the mid-1980s Berkshire’s trailing alpha versus the S&P 500 was nearly twenty annualized percentage points—an almost unheard-of advantage over two decades.
Beginning in the mid-1990s that edge began a steady decline. In recent years Berkshire’s performance has hovered around market parity—a shift that highlights a broader pattern rather than any single failure.
“Why Scale Erodes Edge”
Managing hundreds of billions creates mathematical and practical constraints. The most attractive mispriced opportunities are often too small to move the needle for a giant portfolio.
Even when Buffett identified excellent businesses, allocating a meaningful portion of Berkshire to them became impractical. As capital grows, the universe of investments that can materially improve performance shrinks.
“The Recognition-Scale Paradox”
Success attracts capital and attention, and that inflow can undercut the very advantages that produced the success. The media timeline illustrates this: Buffett first appeared in the Wall Street Journal in 1965, received a full profile in 1977, and wasn’t widely discussed until the 1980s–1990s—around the time his alpha faded.
By the time a manager’s skill is obvious enough to draw broad investment, the conditions that enabled outperformance are often already eroding. Conversely, backing managers before they have a long record risks mistaking luck for skill.
“Practical Lessons for Individual Investors”
The search for the “next Buffett” is fraught because proven skill usually brings scale that reduces future edge. One option is to try to find talented, smaller managers, but the act of proving skill tends to attract capital and create the same problem.
For most investors the pragmatic conclusion is to favor low-cost index funds. Accepting market returns can be a rational response to the structural realities that make persistent outperformance rare—even for legends.
“Conclusion”
Buffett’s real achievement was the extraordinary longevity of his outperformance, not immunity to mean reversion. His career teaches that excellence can persist for decades yet still face inevitable limits as success breeds scale and competition. Recognizing those limits helps investors make clearer, more realistic choices about where to place their capital.
