Why Isn’t Warren Buffett Beating The Market?

Over the past 54 years, Berkshire Hathaway has outpaced the S&P 500 by almost 2.5 million percentage points, but growth has stagnated since 2010

Feb. 12, 2020

The Financial Times magazine recently calculated that $1 invested in Berkshire Hathaway (NYSE: BRK.A) ten years ago is worth about $2.40 now. The same dollar would be worth $3.20 if invested in the broader S&P 500 Index (NYSEARCA: VOO). 

The company is headed by one of the most successful investors in the world, Warren Buffett, who has a massive wealth of $88.9 billion as of December 2019 making him the world’s fourth wealthiest person.

Source: Financial Times

Buffett is well known for his value and bottom-up fundamental investing techniques. These strategies are widely known and followed by asset management companies and taught in B-schools. The company is heavily influenced by the same and plays with politically and financially volatile sectors like energy and finance. That’s one of the main reasons behind such a significant underperformance. The financial and energy sector are the worst performers since the 2008 Financial Crisis. Financials consist of 46% of Buffett’s portfolio, including Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC). Buffet’s overall allocation to banks is almost double the S&P 500 (21%). 

The other part of the financial services portfolio is insurance. Berkshire has exposure to almost all the insurance products, including P&C insurance and reinsurance markets. These industries are a part of the wider financial sector, which is the most cyclical, making Berkshire’s portfolio more vulnerable to slumps or economic downturns. 

Part of Buffett’s portfolio consists of energy and utility companies that contribute massively to operating income but have traded at a significant discount to the S&P 500 Index since the 2016 oil crisis. Berkshire is well known for its positions in Occidental Petroleum (NYSE: OXY), General Electric (NYSE: GE), PacifiCorp (OTCMKTS: PPWLM) & MidAmerican Energy.

Source: Bloomberg

Buffett has taken a contrarian view on the tech sector from the very beginning as it goes against his value investing principles. Value investing considers buying companies that are cheaper relative to their intrinsic valuation or the valuation relative to their peers. In the last decade, the tech sector has been the best performing sector and is often classified as a growth sector. The best performers are the big tech stocks like Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOGL), Facebook (NASDAQ: FB) which trade at expensive price/earnings multiples. 

Buffett started buying a stake in technology recently and it’s 26.5% allocation consists mainly (90%) of Apple (NASDAQ: AAPL) with a staggering $56.7 billion stake, Amazon, VeriSign Inc. (NASDAQ: VRSN) and StoneCo Ltd. (NASDAQ: STNE). It earlier had Red Hat as an investment but it was later acquired by IBM (NYSE: IBM) in a full cash deal.

Apart from his current holdings, Buffet was widely criticized for holding a massive amount of cash. Some investors speculated this as him expecting the next downturn to be close while others thought of it as a lack of investment opportunities or any upcoming big acquisitions. Buffet used some of this excess cash to buy back shares of Berkshire Hathaway. In 2018, Berkshire’s board eased restrictions on buyback from a 1.2x price to book. This also signaled Buffett’s view on intrinsic value as the company bought $2 billion worth of shares in the first half of 2019.

Berkshire Hathaway – Share Repurchases

Source: Bloomberg Intelligence

Moving forward, one thing is important to watch. Who’ll be the next CEO? As the 89-year-old legend will step down from the position in the near future, it will likely be one of the two vice chairman – Ajit Jain or Greg Abel. 

The other thing will probably be the sector positioning of the portfolio in the coming years, and the positions Berkshire takes in the high growth technology sector which will possibly boost investor confidence and will be reflected in the stock price.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Berkshire Hathaway. Read our full disclosure policy here.