Beating Bobby Fischer

During the 1998 Berkshire Hathaway meeting, Warren Buffett and Charlie Munger were asked a question about the return-on-equity of American banks. They commented on the topic in a typical Berkshire-like fashion. They then got off on a tangent that provided a truth of biblical proportion.

So it’s not at all clear that if all American management were dramatically better, leaving out the competition against foreign enterprises, that returns on equity would be a lot better. They might very well drive things down. That’s what, to some extent, can easily happen in securities markets. It’s way better to be in securities markets if you have a 100 IQ and everybody else operating has an 80, than if you have 140 and all the rest of them also have 140.

So the secret of life is weak competition, you know. (Laughter)

Somebody said, “How do you beat Bobby Fischer?” You play him in any game except chess.

We think this is an excellent time to ponder the thoughts of Buffett and Munger.

Over the last 12 years, the chess game for the S&P 500 has been the technology sector. Let’s first start by looking at how technology has explained 10-year S&P 500 returns. Below is a chart that we were provided by the folks at Fundstrat.

As investors can see, the 2010s were almost completely explained by the performance of the technology sector. The blue years follow a tight relationship between the technology sector (R2). Interestingly, the 1990s weren’t as well explained by technology stocks until 1998-2000.

Below is more data provided to us by Fundstrat that shows the explanatory power (R2) of tech and the S&P 500 by decade. As readers can see, it is true that the 2010s were well explained by the tech sector (97%). It’s true that the terrible 2000s were also explained by tech (96%). This was a decade marled by stocks producing bear market declines and negative nominal returns over 10 years. The worst problem for investors and wealth was in the real returns, as Jeremy Grantham would remind you. You can see this relationship plotted by year in the chart above as well.

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