In this article, I will be looking at historical returns for Berkshire Hathaway (NYSE:BRK.B) from the point of view of the average investor. The basis for my article is that price matters to the average investor, which is why the average investor cannot afford shares of Berkshire Hathaway class A stock (NYSE:BRK.A) which is currently trading at just over $173,000/share. This was also true for the class B shares of Berkshire Hathaway up until January 21st 2010 when the class B stock split and the stock went from $3476/share before the split to $72.72/share after the split. From an investor psychology point of view, this was great because it allowed the average investor to "cheaply" buy what was psychologically too expensive before the split. I will be looking at three periods of return data for Berkshire Hathaway and comparing the data to return of the S&P 500 (NYSEARCA:SPY). The first period of return data is the time after the split occurred, the second being the years right before the split, and finally the returns since the start of trading for the class B shares on May 9th 1996.
*For all the charts below in each section, the blue line is the SPY, and the black line is BRK.B.
Time #1: After Split
Instead of just using a simple chart to play return data, also wanted to make sure I included dividend payments, because the SPY pays a dividend and BRK.B does not. I used the dividendchannel.com DRIP returns calculator to look at the return data for the periods of time I selected. For my start date, I used January 21st 2010, which was the first day of trading after the split occurred and I used today's date as the end date. The chart below shows the performance of BRK.B and the SPY plotted out over that period. As the data shows BRK.B has had a total return of 58% over this period whereas the SPY has a total return of 71.80%, which is a significant underperformance since the average investor has been able to purchase shares of BRK.B.
Time #2: Pre Split
For this period, I took the length of time from Time #1, and looked at that same amount of time with January 20th 2010 being the end, and March 20th 2006 being the beginning point. The data in the chart below shows that leading up to the split, BRK.B significantly outperformed the SPY, with BRK.B having a 16.45% total return and the SPY having a -5.48% total return. This is the last few years of returns for which Berkshire was unaffordable for the average investor, and it showed a clear outperformance.
Time #3: Inception to Split
For this period, I used the inception date of the class B shares of May 9th 1996 as my starting point and I used January 20th 2010 as the ending point because that was the last day of trading and pre-split prices. Over this long-term period, shares of BRK.B significantly outperformed the SPY, with BRK.B having a 199.66% total return, and the SPY had a 116.16% total return.
Going forward, there are two outcomes I believe which could occur based on this data. The first outcome that could occur is, in the long-term BRK.B will continue to outperform the SPY, which it has done since its inception, and the recent 4-year period of underperformance is nothing to worry about in the long-term. If you are a long-term investor, and you believe the long-term outperformance of Berkshire Hathaway will continue, and are comfortable with the potential of Warren Buffett retiring in the next 5-10 years, then going forward BRK.B shares are worth owning.
On the other hand, another possible outcome is that this 4-year period of underperformance since the stock split occurred could be a new trend, and thus if true, the average investor would be better off owning a broad market index ETF like the SPY, or other broad market ETFs.
In conclusion, I believe the second outcome is more likely to occur. There are three reasons that lead me to this conclusion, the first reason is the stock has underperformed the SPY since its split, most likely because the drop in the price because of the split led to a significant change in the shareholder base. The second reason is that Warren Buffett will most likely retire in the next 5-10 years, and most likely when that happens, Berkshire Hathaway stock will take a hit to its stock price in the short-term, and the long-term value of Berkshire stock will depend on who succeeds Warren Buffett as manager[s]. Based on these factors I believe that a broad market index like the SPY will outperform going forward.