Berkshire Hathaway Loses $54.5 Billion Last Quarter

Berkshire Hathaway Inc

Warren Buffett wants investors to turn away from their massive losses in Q1, calling them “unrealized gains and losses.” His shareholders are certainly realizing them though.

We typically do not show any favor for those who don’t do a very good job in the investment world, as it’s at least as important to show how approaches fail and continue to fail as it is to show what good investing is supposed to look like. There are endless opportunities to show you failure as it turns out, and with most of it, investors usually don’t get that they are failing at all, if they perceive this failure as the norm.

That’s why it’s so important to realize what failure really looks like, as well as contrasting this with success, and this is really needed to shake up investors who have been lulled into accepting too much risk and especially accepting far too little return on their investments. Return on investment is what it is all about for investors, those who look to hold things over time, like Warren Buffett does, and if we’re happy to settle for peanuts, that’s what we’ll end up with.

Warren Buffett has had such a storied history of success over the past 50 years that we do want to take that into account when looking to provide the level of critical analysis that everyone needs to be subject to, and certainly want to distinguish between his glory days and more recent times where his advanced age seems to be getting the best of him, particularly with his hoarding all that cash which we would at least presume is being held for a reason other than just piling it up, to do something with it at some point.

Buffett has been telling us during this time that he didn’t really find much he liked enough to invest in, while stocks continued to go up and up, leaving him further and further behind if he actually did have any plans on investing this money. Time waits for no one, not even Warren Buffett.

Meanwhile, the stock of his company has continued to underperform, during the entire bull market that just ended, and carrying over to the ugliness of 2020 so far. We suspect that relative performance doesn’t matter so much to him, but it does matter to his investors, or at least should.

If we can do better in something else, that might not influence things a whole lot because investors are creatures of habit, especially the ones that Buffett wants to attract, those with a strong commitment to holding his stock. This idea has been behind Buffett’s refusal to ever split his Class A stock, which is the reason why it costs over $290,000 to buy a single share.

What this does serve to do is to keep all but very big investors out of this particular stock, but it’s his company though, and if he and his shareholders decide to never split this stock, it’s their stock. We aren’t looking to criticize this, even though it does hamper liquidity, and on the contrary, the fact that he pulled this off and has seen this stock actually outperform the version he created for ordinary folks over all these years is further testimony to how good he was.

25 years ago, you had to be a big investor to invest in Buffett’s company, as $30,000 a share is way too rich for those who are not already rich. The Berkshire Hathaway Class B shares were born in 1996, hitting the market at a much more reasonable price of $24 a share, and even after all these years, $187 will buy you a share of this.

When you have a net worth the size of Buffett’s, and have had as much success as he has, and with much more money than you could ever spend on anything, perhaps erecting a shrine to yourself to show how well you’ve done isn’t all that unreasonable. This is what the unsplit Class A shares has become, a mountain allowed to grow all the way up to the sky so we can all look upon it and imagine what it would have been like to get in at the bottom of this hill, at $265 a share back in 1980, and look way to $290,000 and see how well Buffett has done.

The S&P 500 is generally the benchmark for stocks so let’s have a look at how big Mount Buffett has grown over the years in comparison. Since the stock started trading in 1980, the S&P 500 has risen by 2827%, but nowhere near as high as Berkshire Hathaway’s 10,630%. That’s over a thousand times more. This shrine is indeed worthy of a legend.

We’ll continue on comparing to see how these two continued to measure up over time. Over the last 20 years, the big index is up 92%, which includes the 2000 crash and the 2008 one, and the little one this year, taking us up some pretty steep mountains and valleys along the way. Berkshire Hathaway showed them up again pretty mightily, with a gain of 484%.

Over the last 10 years, a mostly bull period with a little bear tail at the end, the S&P 500 grew by 144%. Buffett’s company moved up by 138%, which isn’t that far off the index but this is where the luster that had this stock shine so much started to tarnish.

Over the last 5 years, the tally is S&P 500 34%, Berkshire Hathaway 26%. In the last 2 years, the S&P rose 8%, with Berkshire lost 7%. Over the last 12 months, the S&P 500 is off by 3%, while Berkshire Hathaway is down by 16%.

There is Lots to Be Concerned About with Berkshire Hathaway

We can see how things have unraveled for this once mighty investor and his iconic stock, and this is a big part of why we remarked last year that time has well passed Warren Buffett by. His legend only counts for so much, and a decade of underperformance which has been getting worse by the year tells a real story and one that is long enough to really tell it well.

Watching this company sit on over $100 billion of cash last year in the midst of one of the best years for stocks ever also spoke pretty loudly about how the fortunes of this stock have turned. As much as we hated to say it, Buffett and his long-time sidekick Charlie Munger were really starting to show their age, and with Buffet turning 90 soon and Munger now 96. The fact that they are still doing what they do is simply amazing, but to be still doing it at a world class level seems too much to expect. Even Batman and Robin get old eventually.

Both were active during Saturday’s earnings call, and this one could not have been so easy, given that they announced a $54.5 billion loss last quarter. Always looking for a positive spin, Buffett told investors that they should not worry about the ups and downs of the market and focus on the company, and he proudly proclaimed that its earnings were not so subject to market whims and are expected to come in around $24 billion this year after taxes.

We can’t ignore the fact that this is a thinly-disguised deflection though, or perhaps not so thinly disguised if you don’t realize that it’s the real bottom line that matters. We can imagine many of his investors nodding along with this and perhaps having their countenance raised by this remark, but the only thing that ever matters if you are a shareholder is its share price, and both earnings and the movement of its component stocks only matter as far as how they may affect the value of the company stock.

We remain worried about the way that this stock has performed, and although that’s been true for a few years now, things have been getting worse on this front, not better. The deeper hole that Berkshire Hathaway has dug themselves in 2020, still being down 20% year to date after the recovery, does not bode that well to be sure.

We remain concerned about all that pile of cash that they are still sitting on, and their neither looking to leverage this last year when the party was full on, or during the big drop we saw in prices recently, and if bull markets and big pullbacks don’t get them out of their seat, we can’t imagine what would.

Perhaps most notably, we wince a little when we see how exposed they are to the financial sector, given that this sector is the one left holding the bag in the end, with the bag becoming so heavy lately. We were mildly bullish on this sector at the beginning of the year, but circumstances do change, and they sure have. The threat here isn’t even in the coming months, not a timeframe that would concern Buffett very much anyway, it’s longer out than that, when rates need to go up again and we risk seeing defaults start to really pile up, when financial stocks may really get beaten up.

In a recent article, we spoke about how investors need to really improve the way that they see sector risk, and like all risk, we can’t just view this in isolation. Sector risk with the tech sector is not higher, but actually lower given how much this sector appreciates in value. With sectors that perform much less impressively, then sector risk can really become a concern, as they haven’t created the same amount of room over time to be able to afford to give all that much back.

An even bigger variable is how the business in a sector can change, like what is not only happening to the financial sector but others such as the oil sector and the airline business. Buffett has avoided taking on a lot of risk in the energy sector, but he does hold a pretty big piece of Occidental, and some are wondering if the company will die of the coronavirus eventually.

Buffett famously held on to Kraft Heinz after its collapse, and we did tell you to expect this, because once a stock has been beat up so much and you own so much of it, there simply isn’t that much to lose. That came true, as Kraft Heinz has lost this year but nowhere near as much as most of his other stocks.

As tightly as Buffett holds his stocks, there is a point where he does lose his grip, and he wisely spared himself of further pain by selling his airline stocks recently. This might have seemed like a good idea at the time, in 2016, but certainly isn’t now, and like the oil business, the infection that airlines got is a serious one indeed and we need to run not walk away from them, and should have done that at the start of this epidemic in fact.

Given how 2020 has turned out, it might seem like Buffett and Munger have been crazy like foxes to hold all that cash, which has now grown to $137.2 billion, up from $128 billion at the start of the year. Cash positions don’t lose, and given how much they lost, they may be thanking their lucky stars, even though what happened could not have been predicted.

Batman and Robin Are Really Showing their Age Lately

Munger defended this by telling us that he wishes to remain cautious among all this turmoil and “we are always going to be on the safe side.” This might portray how much these two men have changed in recent years, and they did not build this company to what it is now by being afraid. While they may not have wanted to meddle in the sale that has been going on, you would think that buying back their stock would be safe enough, and if stock buybacks are seen as too risky to do, that doesn’t say much about the confidence that you have in your company or stock.

It’s not that Berkshire Hathaway isn’t doing any of this, but they are playing for matchsticks instead of real money with their measly few billion a year that they are reinvesting. Even with the stock beat up, they only reinvested $1.7 billion last quarter, with the stock price dropping so precipitously.

From looking at their present holdings, what stands out the most is their failing vision, where they are too laden with stocks that lag in terms of both long and short-term potential, especially on the long-term side, which has historically been their forte. Buffett would see a company with very good growth prospects and he would hold it until it grew, and did this with considerable skill.

Most of the stocks he owns have grown old along with him, and he needs to update the plan to look further ahead, toward stocks like Amazon which he owns a tiny piece but did not add to even though Amazon was crowned king recently. There are always good opportunities if your vision is sharp enough, but when you lose this, everything looks too distant and murky and uncertain it would seem.

Just like we watch sports superstars who hang around the game too long and see their former prowess fade to the point where they become below average, such is the fate of Berkshire Hathaway. We may still root for them, but the experience is at best bittersweet now.

Many have tried to replicate what Buffett and Munger have done, and no one has even come close. They may no longer be in the big leagues in terms of performance and have not been for quite some time, and we might not want to hold their stock anymore, but they are still well deserving of our respect and admiration for their lifetime achievements.

Ken Stephens

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