Subject: Just to be provocative
What will the return of Berkshire Hathaway and the S&P 500 be over the next 20 years? The easy answer is to say, “I don’t know.” You can’t go wrong. After all, the burden of proof is on the person who claims to know. Nevertheless, just to be provocative, I will put forth a guess. I’ll go with about 4%, nominal, for the S&P and 7% for the BRKA.

Here's some background. Since 1965 both the S&P and BRKA have undergone three, distinct periods of growth. You can see these three periods strikingly simply by plotting (semi-log) the S&P 500 index and BRKA stock price over the period 1965 through 2024. Here are the returns during those periods:

Period…………… S&P 500 index………. BRKA stock price
1965-1980……….. 3%........................ 19%
1981-1999………. 13%........................ 27%
2000-2024…..…… 6%........................ 10% (least squares)

I’ve not seen anyone on the Berkshire Hathaway message boards offer an explanation for these distinctly different periods of growth. The simplest explanation is that valuations in 1980 for both the S&P and BRKA were very low values, with the trailing P/E on the S&P dropping to 8 and the trailing P/BV of BRKA at 1.0. Then in 1999 the trailing P/E of the S&P got up to a very high level of 33, and the P/B of BRKA got up to 2.1 (Actually the peak P/B occurred in Q2 1998 at 2.8).

My deliberately provocative forecast is based on the notion that valuations are again at an inflection point, similar to 1981 and 2000, and are now rolling over from their 2024 highs, and that they will fall to below average valuations over the next 20 years (Note that valuations do not revert to the mean. They cycle about the mean, which is different. You can see this dramatically in Shiller’s CAPE versus time charts, https://shillerdata.com.) Let’s estimate that the P/E on the S&P 500 will fall from its 2024 high of 29 to a low of 15 (versus a fair value of about 17) over the next 20 years, and the P/B of BRKA will fall from its 2024 high of 1.7 to 1.4 (versus a fair value of about 1.5). Assuming 8% nominal returns before valuation changes for both the S&P index and BRKA, those valuation changes bring the nominal return of the S&P to 4% and the nominal return for BRKA to 7%.

I realize that similar arguments could have been made several times in the last five or six years, and indeed were made by John Bogle, Jeremy Grantham, Hohn Hussman and myself, but we have to ask ourselves what forecast is most probable relative to 2000-2024, (1) the same returns, (2) higher returns or (3) lower returns. I’m arguing lower returns.