Why Can’t Buffett Beat the Market?

Warren Buffett's worshipped as perhaps the greatest investor of all time, but believe it or not, your money would have been better invested in the S&P over the last 12 months, and in fact for well over a decade now. And I think there's a far better explanation for what's happened to Buffett than the one that most people will jump to, and it's one that has direct implications for what you might be holding right now. So in this video, I'll explain the shift that's catching many investors out. I'll have updated my own strategy that I built back when I was managing 8 figures as a pro and the new way that you can get better returns without wasting your money on product or advisor fees. Now, before we get into the numbers, I think there's a broader question here that needs to be answered beyond Buffett. If you're tempted to buy a fund, or a stock for that matter, on the basis of it having a brilliant track record, could that record be misleading? Because the world's most famous stock picker was getting beaten by cash for much of the year, and Berkshire, or Berkshire It's been lagging the S&P for a lot longer now. So what happened? That kind of money wasn't even put in the railroad business. No. So when they were asset light, you didn't like them and the markets loved them. Now that they are— I made a mistake. Now, for any fund manager to be worth their salt, you expect to see two things: better ideas and better diversification. But looking at Berkshire Hathaway's holdings, you don't need to look actually beyond the first three lines. Over 50% of your money is in just 3 names here. And if you compare this to the S&P 500 at 40%, this concentration looks even more extreme because you've now got basically half of your money in 10% of the bloody Dow Jones. And that's only going to work if you have truly exceptional ideas. But Apple's valued at nearly $5 trillion, guys, and it might be the most obvious stock in the world. And between Amex and Coca-Cola, well, they're hardly going to steal a charge on multi-planetary space flight and AI infrastructure. They're not exactly the new SpaceX, are they? So those investments might have built Buffett's reputation, but that's irrelevant if you're looking at Berkshire today. But before rushing to conclusions regarding Buffett's competence or his age, there might actually be another reason. Now, if you're watching this from outside of the UK, first of all, congratulations, you've avoided the shit weather, horrendous taxes, and the political circus that I thankfully left behind a few years ago. But you might not have heard of Terry Smith. So he's basically a household name back in ol' Blighty, and until recently he ran the largest equity fund in the UK. His mantra is buy good companies, don't overpay, and do nothing, which is remarkably simple, and it worked extremely well for him for a number of years. By Fonds Smith's own figures, the fund was the 3rd best performer out of 155 peers in its sector since 2010, with a return roughly 320% higher than the average fund in the category. So like Buffett, if a fund manager deserved your money based on what he knew 15 years ago, you'd probably say it was him. And that's exactly what makes the rest of this story so interesting, because this is where things start to change. In 2025, Fundsmith made just 0.8% over the entire year. Meanwhile, the MSCI World, returned 12.8%. And even in cash, just leaving your money sat in a bank account or maybe a market fund, returned about 4.2%. So he lost to cash. It was going to get worse because in the first half of this year, 2026, the fund fell nearly 3% whilst the same MSCI World benchmark rose about 11%, which has led many people to question whether Britain's Buffett is finished. But I want to be fair here and not turn this into some sort of witch hunt because the actual picture is a lot more interesting. In a recent shareholder letter, he basically pinned on passive investing. In other words, index funds, many of which are tracked by the big ETFs. Whilst that might not come as a surprise to some of you, seen as, you know, it's the competition for him as an active manager, I don't think this is just a case of sour grapes. See, back in the '90s, when I was learning to ride my first BMX and watching Jurassic Park, active funds actually made up 80% of of all trading volume, whereas today it's just 10%. And it's this tsunami of passive money coming largely via ETFs that Terry claims is distorting the market for stock pickers. Because when you buy something like VOO or SPY for the S&P 500, the ETF isn't looking at fundamentals or for any value. It's just buying everything in the index divided up by size. So the biggest companies get the biggest share of your money regardless of what they're actually worth. And this creates momentum bias, which is what Smith is blaming for his recent poor returns. So let's take a look at the evidence of this with a couple of charts. So there are two Invesco ETFs here, one tracking the S&P 500 momentum stocks, and then the other which tracks the S&P but is equally weighted, so it doesn't have that same bias towards the bigger companies. And since listing in 2016, the momentum version has returned 300% more than the equally weighted S&P 500. And this gap is the momentum effect that active managers like Smith are now blaming. But I don't completely buy his excuse because the momentum factor has also seen this ETF pull away from the regular capitalisation-weighted S&P 500 index in the last couple of years. And the quality version has kept up with the market and therefore beaten Von Smith's active quality-focused strategy too. So this isn't a case of Terry's style suddenly falling out of favour, which means you're at no disadvantage investing in quality stocks than you are otherwise investing in the broader market. And whilst the momentum bias is plain to see, it wasn't actually what beat him, because there's a much bigger reason for the Old Guard's underperformance. And if your portfolio is full of the same risk, then your returns might take a serious hit. So let me show you what's actually behind it and how I've adapted my own strategy to get better returns so that you can do the same. So just as we did with Buffett, here are Terry Smith's latest holdings for Fundsmith. You can see at the top, likes of Marriott, Stryker, Waters. You've obviously got a hotel and some healthcare stocks there. And until recently, both of them tended to avoid the high-flying tech names in favor of these more traditional sectors. That's only half the problem for these guys, because some of their positions have completely missed the threat of AI disruption as much as its potential. So take Intuit, for example. Now, when he first bought back in 2017, you can see that the stock was trading at a 35% premium, so it's pretty expensive. But when he sold in 2021, the premium was even richer. So that was actually quite well judged. And when he bought again in 2025, the valuation this time was actually much closer to fair value, which once again made it seem like good judgment. But there was something that he was missing here. See, back in 2017, even in 2021, AI was yet to hit the market. ChatGPT wasn't released until late 2022 when Even then, its poems and leftovers recipes weren't exactly a threat to multi-billion dollar software companies. But then the world changed, and suddenly the track records of companies like Intuit, no matter how impressive, were almost irrelevant overnight. So Smith had missed out on the threat of AI disruption here and built up this big position in Intuit before selling right into the SaaS-pocalypse that took out so many companies, including Intuit, less than 12 months later. So the market had of course woken up to the realization that many of these software companies were now at risk, but Brins Buffett hadn't, and it added to this string of bad calls. Now, I'm not saying that every loss was a result of AI risk, and Smith himself has owned up to mistakes in companies like Novo Nordisk and Nike, and that's just part of investing. But here's why the AI threat was actually avoidable and how you can make sure that you're not left holding the stocks that might be next to be taken down. So returning to the model, you can see that there's a column here which flags AI risk. It was correctly identifying the problem that was coming for Intuit. And of course, there are other examples here— analytics providers like MSCI, for example, S&P Global, both of which Terry Smith still actually owns. And then there's payrolls company ADP in and amongst this. So it seems this problem could repeat itself looking at Fundsmith's portfolio, and that's why I think these guys are losing. Not because they don't know what a good company looks like, but because they failed to adapt to the risks and the opportunities that investors nowadays can't afford to ignore. So here's what we can do about it. Returning to the model again, we can take the top 10 stocks in this list according to the universe, the strongest companies, Excluding those that have AI flagged as a risk, then here's the result. So over the last 5 years, about 140%, and these are global stocks. You've got XTB, for example, I believe, or a Polish broker, GTT, uh, which are also European, and a bunch of other companies including the likes of ASML, and then some of the American names that you'll no doubt recognize. So perhaps the best benchmark for comparison is the MSCI World. So you can see that those stocks have returned twice that of the global benchmark without any of the AI risk that ultimately has cost a number of the big fund managers, including Terry Smith, and arguably perhaps also Buffett. But perhaps a fairer comparison would be to look at an equal weighting of the MSCI World, because remember, the benchmark is cap weighted, so it has that momentum working in its favour. Whereas our basket is just a straight average of the 10 companies, so equally weighted. And that's what we can see at the bottom here. So this is arguably a fairer comparison, and that's returned barely 40% compared to over 140% in the case of our picks here. And if you want a list of these 10 stocks that made the cut, then I'll leave a link to that also in the description below. Now, if you want to go further than these 10 names, then watch this video next where I'll show you exactly how I've rebuilt my £2 million portfolio, having analyzed thousands of stocks as a pro, that hopefully you can get some ideas from too. So grab yourself a coffee, I'll see you in the next one.