Is Berkshire Hathaway A Better Investment During Volatile Markets?

February 25, 2022No Comments

Hello, and welcome once again to the Smart Money, Dumb Money Show. And I am your host as usual, Keith Richards, I’m president and chief portfolio manager of ValueTrend Wealth Management. And today I’m going to talk a little bit about Berkshire Hathaway. That wonderful company run by Warren Buffet, the ultimate value investor. And I wanted to take a look at the breakdown of his fund and make an assessment as to whether holding the Berkshire units. Now, I tend to look at the Berkshire baby units. They’re called BRK.B simply because they’re easier for most investors to actually afford to buy a share in. So let’s take a look at Berkshire, whether it’s the A or B shares, they’re comprised of the same components. And let’s see if they are worthy of buying in the current potential market environment going forward for 2022.

So I’m going to share the screen and we’re gonna basically start off with the premise that there may be a chunk of market volatility in 2022, and perhaps this year or in a subsequent year, we may even enter into a genuine bear market. So people are always looking for alternatives and sure cash is a place to go if markets are volatile, but you don’t make any money on cash. So it’s interesting to see if you could maybe hold some other assets that actually would make you some money during a volatile market or even a bear market. Now, the other part of saying, well, I’m going to go into cash because it’s going to be a bear market. You’re now making an assertion that you know, that there’s going to be a bear market. So at ValueTrend, I have been running a blog for many, many years now.


I think it’s about 15 years. And I emphasize the tools that you can use to get out of a market if it begins to round over and get into a bearish situation. In fact, if you subscribe to the technical analysis course that I put together recently, then I teach you a step-by-step process on how to deal with any market from a technical perspective. By the way, while on that subject, the technical analysis course has a discount to blog investors and that’s only available until the end of February, which is only about a week from now. So if you have been humming and hawing on whether deciding to purchase the course, do it now, or lose your discount. Anyways, let’s go right into, I’m going to do this slideshow presentation because it ends up being a little bit bigger. Here we go. One second here, it doesn’t seem to be doing the full expansion doesn’t matter.

So I’m asking the question. Is Berkshire a better alternative to an index ETF in the first quarter of 2022? And oops, the first thing I’m going to do is present a possible scenario for the market. Now, this is a chart that I’ve shown in the past. It’s really just the sentiment chart of how a bull and bear market looks. So what happens typically is a bull market follows a nice steady market return. And then at some point it starts to arc up parabolically and one could argue that we certainly saw that since the 2020 correction that the market, the S&P in particular, went up parabolically. And the concept of this sentiment chart is that after a parabolic rise, you get a drop, a rally, and then a further drop. The question I have been asking is the recent volatility that we have seen on the markets.

And I’m making this recording about the third week of February, 2022. The question I’m asking is, did we just see this and the rally? And are we going to enter into a bear? That’s not something I’m going to answer, cuz I can’t tell you, but I can ask if there are alternatives if this does turn into a bear and we’re going to look at Berkshire. So let’s look at the components. The first thing I want to look at with the Berkshire fund is how it has been done during crashes. Now market corrections are one thing, but outright 30%, 40%, 50% market crashes are another. And so I wanted to know the two most recent market crashes were in 2001. Saying the word recently, we’re still talking about 20 years ago. You can tell how old I am and how long I’ve been in the market because I was already probably halfway through my career in 2001 when the stock market crashed.

So I’ve been in this game a long time and it was the tech crash and I lived through that. But what I wanted to explore was how did Berkshire do during that period of time? And the black line here is Berkshire and the red line is the S&P 500. Now you can see the S&P 500 fell in the 2001-2002 crash and Berkshire actually went up. Well, that’s because there was an eventual flight back into these value stocks. If you remember, if you were an investor in 1999, if you didn’t own stocks like Nortel and Motorola and all them, you were just out of the game. And I remember I actually got yelled at by clients in 1999 that I was owning these horrible stocks like Johnson and Johnson and Canadian Banks, and I wasn’t making them enough money.

So that was then this is now. I learned to yell back now that this is what I’m going to do. So that was a period of time where Berkshire outperformed and this chart here is what’s called a correlation chart. So when it’s under this line, it’s negatively correlated to the market and it was very negatively correlated into the market then, and this is a relative performance against the S&P 500 on a percentage basis. And you can see it absolutely outperformed the S&P 500 in a big way. If you added it up, it like a many, many, many percentage points out performance. So the second time that you saw this similar situation happen, as you can see, that there was a massive period of outperformance by Berkshire between 2007 and 2009. And that’s when market really rounded over.

Here is Berkshire again, now it did fall, but you can look, they kind of started off near the same area. And you know, a couple years later the Berkshire was only down really from here to here. So it wasn’t a big drop. Whereas, of course, the S&P fell another 50%, just like it did in 2001. That index was very close to down 50% in 2001. And it was down somewhere very close to 50% in 2008-2009. So the other thing you’ll notice is the correlation went negative again. Okay. Now, most of the time it should be noted that most of the time Berkshire shares are pretty much in line with the market. You can see the performance is pretty much flat. It’s pretty much in line. So what this is telling us is historically that Berkshire shares really weren’t any better than buying an index most of the time.


Like the reputation of Warren Buffet is as a value investor and he does have a good tracker record, but he seems to outperform the markets and make his outperformance over the long run by outperforming during those bad times. So if you did buy into the belief that the market might go into a market crash, and you still wanted to hold some equity, because if you make the point of saying, well, I’m just gonna go all into cash, because I think the market’s gonna crash. Well, that’s a flat assertion, the market’s going down and you don’t know that. So your best to have strategies where you can stay invested and maybe make some money just in case the market goes up. So Berkshire could be that strategy. Now I might point out that you should take a look at the ValueTrend Wealth Management performance charts, and we have been outperforming during both good and bad times.


And you can verify that by looking at a performance chart. And I really can’t wait for the end of February, because not only have we been outperforming the market for the year of 2022, so far as the market’s been falling hard, but we’ve had particularly good performance in February as the market’s really been volatile. And actually we’ve had positive performance as the tape has been heading down. And I can’t wait for our numbers to come out. And it really does go to show you that strategic asset allocation and moving into cash and moving around as active investors like ValueTrend is, this is when it matters. During good times, as you can see here, even with Berkshire, everybody made money. I wrote a paper of awhile ago, an update for our clients and non-clients can subscribe to our newsletter as well.

It more or less gives you the same information and I called it, Any Fool Can Do It, you know, and you can in a bull market. Everybody’s a hero in a bull market, but it’s when things get rough that it comes down to a skill level. And Warren Buffet has that skill level with him and his team and ValueTrend has that skill level because we know how to make money or at least preserve wealth in a bear market. So back to Berkshire Hathaway. This is kind of a long term chart going back to 2014 and how they have been positioned. And I’m just gonna grab my cheat notes here. And the red line here is technology, and you can see way back in the 2010 to 15 period, there was very little technology in the portfolio, and it expanded to a point where technology is literally 50% almost of his fund.


Now really that technology is largely in one stock, it’s in Apple. And I think it’s very close to 48 or so percent of the entire fund is in one stock, Apple. And he’s also got some Amazon, alright? So these are very good companies and he’s invested heavily in them. As you can see, his positions have expanded over the years, somewhat because of their growth and somewhat because he really believes in the story. The next biggest position that he’s held pretty consistently is the financial area. It is about 29%. Now, financials, there’s different parts of financials. There’s insurance and he’s well known for having held insurance companies for many years, but there’s also banks. He’s had a big position in, for example, Bank of America for many, many years. And finally, there’s the third-largest position, which is kind of hard to classify it, but we’re going to call it kind of industrial consumer type of products, non-renewable projects, things like railways.

He’s very famous for owning CSX railway and a couple of others, and as well as other companies that are sort of stellars in the world of industrial manufacturing and whatnot. So this is how he has been positioned. If you took the balance of that. So that might be another, you know, 7 or 8% of the entire portfolio. It’s in a number of different companies. He’s got some communications like Verizon and a few other things, but really you want to know how Apple’s doing. You want to know how the financials look and you want to know how, for example, the railways are doing, if you’re buy Berkshire Hathway and you want to know what they look like for the future. So that’s what I thought I would focus on. And so what we’re going to do here is we’re gonna look at Apple and you can see, in fact, I will move my picture over here.

You can see Apple, despite the market corrections of lately, Apple’s really held its own. It’s still on an uptrend and it looks fine. It’s well above it’s 200 day moving average, and it’s got tons of money flow. This is a money flow chart, and people just keep buying Apple. So this is a good chart. And, if you, so when you look at the fact that Warren Buffet has almost 50% of his money in this stock, well, okay, it’s not a bad chart. Shouldn’t be too afraid of that. So this is the financial index. So it’s the SPDR Financial Index. So it contains brokerages. It contains banks and it contains insurance. And you can see that it too is in a bull market. And you might recall if you do read my blog, that I was recommending that readers of the blog have an allocation into financial stocks.


Why? Because they do well when interest rates go up. What’s going to happen in 2022? Interest rates are going to go up because there’s this inflation stuff happening right now. So I think you gotta own some financials. And most certainly, Mr. Buffet owns some financials. He’s 29% financials. Now, again, he’s in different areas of financials, but they all tend to do very well in rising rates, particularly the banks and insurance. And I know he is very heavily into insurance. Finally there is that kind of fuzzy area, the industrials and the rails and all that sort of stuff. And there’s a lot of different companies in that area. Burlington Rail, whatnot. I have my cheat notes to the side here, but again, what we’re interested in looking at is the chart. And you can see this is CSX, the railway.

That’s a good chart. It’s above the 200 days. It’s in an up trend, higher highs, higher lows, lots of money flow, as you can see at the bottom of the chart. Nothing to worry about here. So the 12% or so, that is in other sectors like communications and materials and whatnot, just add a bit of diversification to the mix. So he’s largely in those three sectors, well, I’m not gonna call Apple sector, but largely in those three areas, and they all look good. So here’s my conclusion on Berkshire. By the way, I’m not talking about the cash and he, it’s been very hard to figure out how much on a percentage basis of the entire portfolio he holds in cash. The percentages I just gave you were of his equity holdings. They did not take the entire platform and put it in cash. And it’s just a mess trying to find that on the internet, but it looks to me like he’s somewhere around 20% cash, but don’t hold me to that.


I’m not absolutely sure on that. So we just looked at the stock percentages and the allocations within those stocks. So the negatives of holding Berkshire right now versus in index is that it really only holds a small amount of cyclicals and energy. And if you’ve been following me since 2020, you know, that I have been pounding the table on energy and pounding the table on materials and minerals, things like that. You know, I’ve been right. If you listened to me, you made a lot of money on that call. And I think that’s one of the issues that the Berkshire fund doesn’t have. It has three main areas that look very good, but it’s missing out on the cyclicals. So that’s the negative. The positive is that the three main sectors look great that are in his portfolio. So I do think that if you’re a passive investor, you don’t like trading, then Berkshire’s a great alternative to a broad market index, like the S&P 500, which has a plethora of companies that may be in the technology area, for example, but are not nearly as positive looking charts or not nearly as robust as a company, like for example, Apple.


So I would not want to own an index right now, especially if you believe that the market might be volatile, but Berkshire might not be a bad holding because you can participate in the market. As you saw, it tends to move with the market if it’s going up but if the market goes down, you’ll dampen your downside most of the time. And I think the concentration he has is actually going to afford that exact thing, a lower level of volatility. You could diversify the Berkshire investment by adding some cyclicals and materials on your own. Just find an EFT or find a number of stocks in the energy and metals and cyclicals and materials area that you like and buy them as a diversification to the three main sectors that Warren Buffet holds in Berkshire. Then I think you’ve got a portfolio that’s very much set for 2022.


Another alternative is to talk to us at ValueTrend because we are holding the financials and we are holding a number of the very bullish, industrial looking type of stocks. And the difference with us is that we are in cyclicals in a pretty big way. And we’re making a lot of money for our clients for it. And because we are a little bit more active than a large pool of assets like Warren Buffet’s assets, we will move out of the cyclical and we will move out of the oils and we will move out of whatever, the financials, when their time has ended. It’s very hard for a multi-billion dollar pool to just sell all their Bank of America or whatever it is that you’re holding. We can, we’re only a couple hundred million all in. So it’s very easy for us to move in and out of sectors and stocks without really making too many ripples.

So I hope that those ideas that I just presented give you some thoughts regarding alternatives to indexes. I think that Berkshire is a great investment for a passive investor and would be made even greater with an element of materials mixed in. And I also think that we at ValueTrend have a very active superior product to a market index over the coming year or so if I am correct about the projected volatility that I expect on the markets. And I encourage you to give us a shout at ValueTrend, if you want to explore your own portfolio. Cause I don’t think it’s going to be a buy and hold market for the coming little while. Thanks for watching. Have a great day.


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