When investors like Bill Ackman invested heavily into Berkshire Hathaway, they may not have bargained for such a huge underperformance. The company, that holds Buffett’s investments, has done just that. Since the beginning of 2019, Berkshire Hathaway stock has seen its value increase by just 4.3% while the S&P 500 is up by nearly 23% during the same period. The last time that Buffett had to endure such a performance was back in 2009. What explains this weak performance of Berkshire Hathaway vis-à-vis the benchmark index?
Sitting on too much cash
For a company like Berkshire Hathaway value comes from constantly putting money to use. The last big investment that Buffett did make was in IBM and that also he was forced to exit at a marginal profit. Apple has stood by Buffett in the last few years. The only big recent purchase was his stake in Occidental Petroleum after it agreed to buy Anadarko. What markets are really worried about Berkshire Hathaway is their stash of $122 billion which they are not putting to good use. Investors like Ackman must be ruing the missed opportunities during the year. Microsoft is up 45% this year, Google is up nearly 30% this year and Facebook, despite all the hiccups, is up 55% from the March lows. Investors are surely beginning to question Buffett’s aversion to technology stocks at a time when the NASDAQ has been outperforming the markets.
Markets shifted for sure
One thing that cannot be denied is that the undertone of the market has shifted in the last 10 years. There are 3 reasons. Central banking policy is more synchronized than ever before making stocks more of a global macro game. That is reducing the stock specific value opportunities. Secondly, a lot of demand for equity is coming because nearly $15 trillion of global bonds are offering negative returns. That is forcing even pension funds and retirement accounts to take the risk of equities to avoid the payout shortfall to retirees. Thirdly, consumer demand is still weak across the world and so it is the service sector that actually outperforms the market.
Buffett may still be right!
Investors writing off Buffett’s approach to investing must remember that it is an approach that has stood the test of time. Buffett was criticized when he had avoided the lure of S&L companies in the 1980s and ICE stocks in the late 1990s. However, eventually Buffett did come out looking smarter. It is hard to beat the wisdom of the man whose fund has generated close to 20% annualized returns for close to 50 years. Buffett is right in his caution that valuations in the global market are ridiculously out of sync. Between valuations and reality lies the flood of liquidity and that makes Buffett uncomfortable. He may still emerge the smartest of the pack! ©