Back in the late 1990’s, Warren Buffett demonstrated his market genius by snubbing the must-own stocks of the dot-com era. For a short while, his corporation (Berkshire Hathaway, along with the “Baby-Berkshire” BRK.B shares seen in today’s chart) underperformed the broad S&P 500 index—mainly at the tail end of the technology bubble in 1998-99. And then, along came the tech bubble blowup. From the tech blowup of 2000, to the credit crises of 2008, the Oracle of Omaha outperformed the S&P 500 quite steadily. Investors, already aware of his investment prowess, really began talking about the “Warren Buffett way”. Berkshire grew rapidly from a market cap of $85 billion in 1999, to some $300 billion today.
But a funny thing happened along the path of almost quadrupling Berkshire’s market cap. Since 2008, Berkshire has under-performed the S&P 500. You can see that on the chart above by noting the red dotted line on the comparative relative strength line. You will also note where I have circled the two corrective actions on the chart – one being 2008/9, and the other being in 2011. Both of these market corrections saw Berkshire experience even higher volatility than the broader S&P 500 index. It would appear that the fund’s prior history of sidestepping bubbles and smoothing out the downside risk has not continued.
Berkshire’s slowing success since 2008 has likely been caused – at least to some extent – by its size. Berkshire, according to one source I read, is the fifth largest public company (by revenue) in the US . With such size, there are less opportunities that your fund can acquire that will add value to your portfolio. Due to its size, the enterprise has moved into investment territories that reach beyond what made Buffett successful. Originally a stock-picking value investor, Berkshire has moved into other asset classes, including derivative bets on market indexes.
Interestingly, Buffett himself seems to feel Berkshire may continue to underperform the stock market. In his most recent annual report, he revealed that 90% of the wealth he leaves his widow will be in an S&P 500 index fund. The chart does not lie – Berkshire is slowly performing more in line with a typical mutual fund. That is, underperforming the stock market.
IMPORTANT CHANGE FOR TOMORROW’S CAMBRIDGE SPEAKING EVENT
Location has been moved to IDEA/Exchange at 435 King Street East, Cambridge – it’s still at 7:00 PM. Still free to all participants. If you love technical analysis, you’ll enjoy this presentation!
Here is a link to find out more about this seminar: http://www.therecord.com/community-story/4479738-business-author-in-preston-next-tuesday/ )
