Berkshire Hathaway's stock plummets as Warren Buffett announces his retirement plans
Berkshire Hathaway Underperforms S&P 500 Amidst Economic Shifts
Berkshire Hathaway, the iconic conglomerate led by Warren Buffett for six decades, has underperformed the S&P 500 since May 2022. Despite the recent pullback, Christopher Bloomstran, the president of Berkshire shareholder Semper Augustus Investments, believes this could entice Buffett to start buying again soon.
Since taking over Berkshire in 1965, Buffett's returns have outperformed the benchmark S&P 500 by more than 5 million percentage points. However, Berkshire's class A shares have declined by 14% since May 2nd, and the shares had surged by 18.9% in the months leading up to May this year.
The S&P 500, on the other hand, has rallied by 11% including dividends since May 2nd. This divergence can be attributed to several key factors.
Sector Exposure Differences
The S&P 500 has a heavy weighting in high-growth technology stocks like Apple, Microsoft, and NVIDIA, which performed strongly over this period. Berkshire Hathaway, with its value-driven, diversified portfolio, has less exposure to these high-growth tech companies and more to financials, industrials, and traditional sectors, which lagged behind.
Market Preference for Growth over Value
Since mid-2022, growth stocks and technology companies have been rewarded more by the market compared to value and cyclical stocks, where Berkshire is more heavily invested. Buffett’s value-oriented investment style means he tends to avoid speculative or high-growth but expensive stocks.
Conservative Approach During Rising Interest Rates
Rising interest rates since 2022 have pressured many traditional and cyclical businesses and reduced their valuations. Berkshire owns many companies sensitive to economic cycles, such as railroads, insurance, and manufacturing, which faced headwinds.
Large Cash Holdings
Buffett often keeps a significant cash reserve ready to invest during downturns. While this is a prudent long-term strategy, having large cash positions during a strong market rally means Berkshire’s portfolio underperforms compared to a fully invested index fund.
Debt and Financial Sector Exposure
Berkshire has sizable holdings in banks and financial services, which have faced challenges from increasing credit concerns, regulatory scrutiny, and fluctuating interest rate environments.
In summary, Berkshire Hathaway’s underperformance since May 2022 is mainly due to its value-driven, diversified portfolio leaning away from dominant high-growth tech firms, combined with broader economic factors impacting sectors where Buffett prefers to invest. This pattern is consistent with Buffett’s long-term approach rather than short-term market trends.
Buffett stopped buying back Berkshire shares in May 2024, citing the stock being overvalued, and it remains to be seen when he might start buying again. Despite the underperformance, Berkshire continued to report healthy operating results across its businesses despite the share decline. It is not yet known who has been selling Berkshire’s class A shares, which changed hands at a record $812,855 apiece in May.
Warren Buffett announced on May 2nd that he would hand control of Berkshire to top executive Greg Abel. Shares of Berkshire fell nearly 5% on the Monday following Buffett’s announcement. Berkshire has been a net seller of stocks for 11 consecutive quarters, pushing its cash levels to 30% of total assets at the end of June.
Despite the recent challenges, Berkshire Hathaway, under Buffett’s leadership, has transformed from a struggling textile mill into a financial conglomerate that continues to generate significant value for its shareholders.
Investing in Berkshire Hathaway's underperformance since May 2022 can be linked to its value-driven, diversified portfolio with less exposure to high-growth tech stocks, such as those found in the S&P 500 like Apple, Microsoft, and NVIDIA. The market's preference for growth over value since mid-2022 has also played a role in Berkshire's underperformance, as Buffett tends to avoid speculative or high-growth but expensive stocks.
