The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial
This argument got me thinking that if the 'Oracle of Omaha' has suggested this adjustment, why aren't analysts following this by adjusting index returns for tax? Some careful thinking however revealed the fallacy in this argument namely that
- Stock Index values are determined by the share prices of their constituents(which itself is determined by the post tax profits)
- Therefore, adjusting the index to obtain post tax returns would be double counting.
Buffet has a valid point that S&P index returns are pre tax for the investor. But then the same is true even for capital gains/dividends. So in this aspect, I feel the logic is flawed.