Warren Buffett, the stock god, recently “retired” again, and although his assistant, Debbie Bosanek, immediately clarified it, the moment of the rumors came to an intriguing end. Buffett’s long-term value investment philosophy has helped Berkshire Hathaway continue to deliver outstanding results to shareholders.
Berkshire’s share price has been disappointing so far this year, with Its A-shares down 19.7 per cent by the close on Thursday, while the S.P. 500 index is down 3.1 per cent, and decisions, including investments in Western oil and the selling of aviation stocks, have raised concerns about whether it is cheap.
A Decade of Loss
Since its founding in 1965, Berkshire’s market capitalisation has grown at an annualized rate of 18.8 per cent over the past 50-year history, while the s.P. 500 has returned 9.7 per cent over the same period.
From 2009 to 2019, or in the latest bull market in the United States, however, Berkshire’s share price has underperformed the S.P. 500 over the same period. Specifically, over the past 10 years, the Composite Annual Growth Rate of the Standard and Poor’s 500 Index ETF has been 13.5%, while Berkshire’s has grown at a CAGR of 9.7%. If investors invested $10,000 in the index fund SPY in early 2009, the market value would increase to $42,415, compared with $28,871 for berkshire.
If you look at the specifics of the year, Berkshire’s performance over the S. and P. 500 is slightly more, but the overall earnings are inreverse, in part because the return on investment is no longer significant, such as Berkshire’s lagging index of more than 20 percentage points in 2009 and 2019, compared with 13.3 percent in 2014, the best performing year.
Multiple reasons for the decline in performance
There are a number of reasons for Berkshire’s decline.
First, Berkshire’s “apathy” towardtechnology stocks is an important factor. Technology stocks, represented by FAANG, have been the biggest driver of the stock market’s rise over the past decade. Even with the impact of the outbreak this year, the Nasdaq is the only one of the three major indexes to regain ground losses this year and hit a record high.
Mr Buffett, by contrast, is obsessed with bank stocks. “Banking is a good industry if you don’t do stupid things with assets, ” Buffett said. “However, the sudden impact of the outbreak on bank share earnings is becoming a risk to the short- and medium-term direction of share prices, and Oppenheimer Bank analyst Chris Kotowski noted in a note that the economic turmoil caused by the outbreak is not entirely apparent, as predicted by the Fed’s 2019 stress tests in a “seriously unfavourable” economic scenario, and an increase in bad debt provisions for big banks may be just a prelude.”
Although the first big stock in Berkshire’s portfolio is Apple, Mr Buffett has previously tended to see it as a consumer goods company rather than a technology company. Berkshire has long held stakes in companies such as Coca-Cola and Kraft Heinz, and while these are still well-known brands, it is clear that current consumer and market preferences have changed.
Second, over the past decade, long-term low interest rates have reduced the cost of financing, and hedge funds can use leverage to expand their participation in the primary and secondary markets. As a result, Berkshire’s competition is even more intense. In the past, Mr. Buffett could invest in high-interest preferred shares in high-quality companies, but such deals are now hard to come by.
In the past, the crisis caused by the current outbreak may have been an opportunity for Mr Buffett, given Berkshire’s huge $130 billion in capital. During the 2008 financial period, Berkshire made a number of highly profitable strategic investments, including large capital injections of Goldman Sachs, Bank of America and General Electric, as well as small stakes in companies such as Harley-Davidson, Tiffany and USG. In all these cases, these companies have approached Berkshire, a long-standing practice by Mr Buffett to wait for a seller to quote rather than actively look for it.
But in this crisis, sellers did not line up to “go door-to-door” because the Fed took timely rescue action. Mr. Buffett’s old partner, Mr. Munger, has said that the phone doesn’t ring and companies are negotiating with the government, and they’re not calling Mr. Warren. With recent global markets rising, backed by liquidity, Berkshire, which has a lot of cash, doesn’t have much of a suitable target.
Chen Kaifeng, chief economist at Huisheng Financial and a professor at New York University, told First Financial that he believes Berkshire’s merger attempt is still being done, constantly looking for more opportunities. Buffett sets three criteria in his shareholder letter: first, net tangible capital must yield a good return;
In fact, many of Berkshire’s investment options in recent years have not been ideal. Last year, Buffett invested $10 billion in Western oil companies to fund the acquisition of Anadarko, but this year’s energy prices have plummeted. Berkshire acquired precision parts for aircraft parts and energy equipment in 2015, but the airline industry has been in the doldrums since 2017. In addition, Kraft Heinz’s thunderbolt, premature liquidation of aviation stocks, the sale of bank shares also hit the market confidence.
No more “greed”, caution comes first
The stock god has missed two stock market crashes in the last two years. In the fourth quarter of 2018, U.S. stocks were a step away from a bear market, Buffett did not sell, in the first quarter of this year in the U.S. stock market experienced a meltdown and panic, Berkshire chose to reduce its holdings, and then in April when the aviation share price fell sharply when all the aviation companies closed their positions. Even U.S. President Donald Trump has commented that Buffett, the stock god, “has been right all his life” but made a mistake in selling airline stocks.
Compared with the chants of “Buy America” 12 years ago, Mr Buffett has not made a big investment move during this year’s market turmoil, and has raised questions about why he has chosen “I’m greedy when others are afraid”.
Ken Fisher, a well-known fund manager and founder and CEO of Fisher Investments, went so far as to say that the “share god” may be due to old age. Like other well-known investors, it becomes more cautious as he gets older and enters a relatively inactive phase. Bill Ackman, a Buffett “believer”, threw out his Berkshire stake last month, saying the Pershing Square fund was “more flexible” than Berkshire’s.
Chen Kaifeng to the first financial reporter analysis, Buffett is very cautious, reluctant to copy the bottom during the new crown pneumonia outbreak, on the one hand, because insurance companies pay more pressure, need to retain more liquidity than during the financial crisis. He is indeed bullish on U.S. stocks, and because after the u.S. stock market crash, when he wanted to buy when the Fed began to inject liquidity, resulting in a wave of U.S. stocks up more than 30 percent, basically causing the “cheap” he wanted to buy has disappeared.
In fact, while shorting aviation stocks, Berkshire hasn’t missed a rebound since March, and combined with Berkshire’s position at the end of the first quarter and its second-quarter share price performance, “heavy stocks” such as Apple and Bank of America have contributed more than $40 billion in investment returns, recovering most of the losses left in the first quarter. In this year’s shareholder letter, Buffett also advised investors to focus on business profits and ignore quarterly and annual investment gains and losses.
Inigo Fraser Jenkins, head of European quantitative strategy at Bernstein, blames the underperformance of value investment strategies in recent years on an efficient market and a low interest rate environment. If the best years of value investing may be over in terms of returns, it often takes more time to reinvent your glory.
Prem Jain, author of “Buffett Beyond Value,” argues that value investments may be “invincible” if viewed in the long run, but at some point it is clearthat it may not be, and that requires enough patience. Value investment strategies are by no means immediate and require sufficient time to brew and ferment. The research shows that the role of value investment is obvious in the market decline cycle, but the performance of value investment is not much worse than other investment strategies in the rising cycle, and many value investors’ long-term investment income can be directly verified.