Berkshire Hathaway: The Compounding Machine That Defied the S&P 500 for 60 Years

Berkshire Hathaway’s stock has been a financial marvel since Warren Buffett took the helm in 1965. Over six decades, the company’s Class A shares have delivered an average annualized return of 19.8%, compared to the S&P 500’s 9.9%, turning a $10,000 investment into $355 million versus $2.4 million for the index. This article explores how Berkshire’s unique strategy and Buffett’s disciplined investing have fueled this extraordinary outperformance—and what investors should consider going forward.

The Historical Dominance

The numbers speak for themselves. From 1965 to 2023:
- Berkshire’s compounded annual return: 19.8%
- S&P 500’s compounded annual return: 9.9%
- Total return comparison: 5,502,284% vs. 39,054% (Berkshire outperformed by a 140x margin)

This gap isn’t just about luck. Buffett’s focus on economic moats—sustainable competitive advantages in businesses like GEICO, BNSF Railway, and See’s Candies—has shielded Berkshire from market volatility. Even when the S&P 500 dropped 19% in 2022, Berkshire gained 4%, driven by its $47.4 billion in 2024 operating earnings from controlled subsidiaries.

Recent Performance: Resilience Amid Volatility

While long-term results are staggering, recent years have tested Berkshire’s model. In 2023, it underperformed the S&P 500 (15.8% vs. 26.3%), but 2024 turned the tide with a 25.5% gain versus the S&P’s 23.3%. By April 2025, Berkshire’s Class B shares were up 17.3% year-to-date, while the S&P 500 dipped 6.4%—a stark contrast as tech-heavy stocks like Microsoft and Meta struggled.

The secret? Portfolio diversification. Unlike the S&P 500, Berkshire avoids overexposure to volatile sectors. For instance, while Apple (a major holding) fell 17% in early 2025 due to tariff concerns, stable investments in Coca-Cola and Chevron provided ballast.

Why Berkshire Outperforms

1. The Power of Compounding
   Buffett’s mantra—“Compound interest is the eighth wonder of the world”—explains Berkshire’s success. Reinvesting earnings in high-quality businesses (e.g., raising $325 billion by scaling back Apple holdings to buy Occidental Petroleum) amplifies growth over time.

2. Cash Reserves as a Shield
   With $347.68 billion in cash reserves by Q1 2025, Berkshire can weather downturns and pounce on opportunities. This liquidity contrasts sharply with the S&P 500’s reliance on dividend payouts and tech-heavy valuations.

3. Non-Correlated Income Streams
   Berkshire’s $1.1 trillion empire includes railroads, utilities, and insurance—sectors less tied to stock market swings. These businesses generated 48% of 2024 earnings through underwriting profits and freight revenue, stabilizing returns during equity selloffs.

Challenges Ahead

• Size Matters: At $1.2 trillion, Berkshire’s scale makes it harder to find “needle-moving” investments. Even Buffett admits, “Our size complicates future gains.”
• Leadership Transition: CEO designate Greg Abel must prove he can replicate Buffett’s magic as the company navigates a $321 billion stock buyback program and $124.8 billion in debt.
• Market Correlation Risks: While Berkshire’s 3-year correlation with the S&P 500 is 0.70, rising to 0.81 could reduce its diversification benefits.

Conclusion: A Legacy Built to Last

Berkshire Hathaway’s 19.9% compounded annual return since 1965 versus the S&P 500’s 10.4% is a testament to Buffett’s philosophy of buying “moats” and avoiding short-term noise. Even in 2025’s volatile start, Berkshire’s 17.3% YTD gain versus the S&P’s decline underscores its staying power.

However, investors must weigh the risks. While Berkshire’s cash reserves and diversified income streams offer a buffer, its sheer size and shifting leadership could test future returns. For long-term investors seeking a counter-cyclical anchor, Berkshire remains a compelling bet—but one that demands patience and a belief in Buffett’s enduring legacy.

In the end, Berkshire’s story isn’t just about numbers—it’s about a business model that turns volatility into opportunity. As Buffett once said, “Risk comes from not knowing what you’re doing.” For now, that’s still the S&P 500’s problem.