Warren Buffett is a legendary investor… but has he lost his magic touch? His holding company, Berkshire Hathaway, has underperformed the S&P 500 over the last five, 10 and even 15 years. So, let’s dig into the data and see what’s really happening. I’ll show you why I’m not as concerned with the recent underperformance.
As a baseline, let’s look at how $1,000 would have grown if you had invested it in the S&P 500 back in 1965…
That single thousand-dollar investment would have grown close to a quarter of a million dollars. Not too shabby. Although, if you invested into Berkshire Hathaway instead, it would have climbed to $28 million today (chart below).
No wonder Warren Buffett has such a large fan base – and that’s including me. I even stopped by his annual shareholders meeting a few years back and attended virtually last year.
Berkshire Hathaway Underperformance
Over the long-term Warren Buffett has crushed it. Although, over the last five, 10 and 15 years, he’s lagged behind the market. Here’s how $1,000 would have grown in Berkshire Hathaway vs. the S&P 500 over each of those timeframes…
If you invested in a low-cost index fund instead, you could have outperformed Berkshire Hathaway. But what’s led to Warren Buffett’s underperformance?
Berkshire’s size has grown and it’s not as agile anymore. In accounting speak, its materiality point is much higher. It has to focus on much larger deals to move the needle. So, its pool of useful opportunities is smaller.
On top of that, I see two other big issues that have lowered returns…
Up first, technology has clobbered the market and Warren Buffett has been slow to adapt. He’s been notorious for avoiding the tech sector. He doesn’t like investing in what he doesn’t understand…
Warren Buffett and Tech Stocks
This has worked well in the past – as you’re about to see – but it’s definitely hurt returns over the last decade or so. The top five largest companies in the S&P 500 are all tech giants. Together, they’ve grown to over 20% of the total S&P 500…
That’s a huge slice of the pie and to compare, I’ve grouped together the other 495 companies. A quick side note… the S&P 500 actually has over 500 different stocks in it. That’s because companies such as Google have multiple common shares listed.
The top five companies here include Apple, Microsoft, Amazon, Google and Facebook. Tesla is also close to the size of Facebook right now but I didn’t include it here… just to keep it with five companies or 1% of the total. Overall, the tech sector is growing and doesn’t seem to be slowing down. It’s built on much better fundamentals than the dot com bubble.
Berkshire has come around a bit. There was an investment in IBM in the last decade… but that didn’t pan out too well. More recently though, in 2016, Berkshire started buying shares of Apple. It’s added on to its position over the last few years and it’s grown to be the company’s largest holding.
This pivot has definitely helped Warren Buffett’s returns and it seems he’s more open to tech stocks, with a recent new position in Verizon which I might dedicate a video to. Please let me know in the comments if you’d like to see my analysis. Although, there’s a second big issue weighing down Berkshire’s returns…
Berkshire Hathaway’s Cash Lowers Returns
Berkshire Hathaway has had a huge build up in cash and short-term investments. It’s climbed from about $25 billion in 2008 to above $140 billion in 2020…
With some recent big buys into Verizon and Chevron, it has likely come down a bit and we’ll see that move in SEC filings… but still, that’s a boatload of cash that’s weighing down overall returns, especially in our low interest rate world.
Berkshire’s market cap comes in at about $570 billion. So, its cash and short-term investments are close to 25% of its size. That’s huge!
Warren Buffett has been struggling to find great buying opportunities for all that cash. Based on many metrics and with history as a guide, the stock market is overvalued. Here’s my PE ratio vs. Stock Market Returns research and right now, future returns aren’t looking good.
Overall though, sitting on the sidelines has worked out pretty well for Berkshire Hathaway in the past…
Slow and Steady Wins the Race
In the late 1990s, many people were claiming Warren Buffett had lost his touch. In 1999, Berkshire shares dropped close to 20% and on the other hand, the S&P 500 shot up 21%. Although, the dot com bubble collapsed early 2000 and the tables turned…
| Year | Berkshire Hathaway | S&P 500 | Difference |
| 1999 | -19.9% | 21.0% | -40.9% |
| 2000 | 26.6% | -9.1% | 35.7% |
| 2001 | 6.5% | -11.9% | 18.4% |
| 2002 | -3.8% | -22.1% | 18.3% |
When there’s another downturn, Berkshire Hathaway will be ready. Its war chest of cash will allow it to buy into some great companies trading at undervalued levels. Unfortunately, the 2020 crash didn’t present many good opportunities. The government’s stimulus quickly propped up the stock market and many other assets.
Still, the big takeaway here is that patience is a virtue. It doesn’t always feel good in the short-term but I believe Warren Buffett’s strategy will continue to outperform long-term.
What do you think? Has Warren Buffett lost his touch? Or will he still outperform? Please drop a comment down below. I read every single one and almost always respond.
Invest mindfully,
Brian Kehm