Why Berkshire Hathaway Will Underperform In The Long Run

Aug.26.11 | About: Berkshire Hathaway (BRK.A)

Warren Buffett is regarded as one of the best value investors of all time as Berkshire Hathaway (NYSE:BRK.A) has outperformed the market significantly since its inception. Due to Buffet's advancing age, the current state of Berkshire's holdings and management's lack of initiative to enter sectors with the most long term growth potential, I expect the company to under perform the market in the future.

The first reason my outlook is negative on Berkshire Hathaway is due to its holdings that are extensively concentrated in financials, US consumer goods, and insurance. With European sovereign debt issues, bad assets covered up by mark to market, a lack of credit worthy borrowers, retirees cashing out of their investment portfolios, and an overall poorer American society versus the rest of the world, American financial companies will continue to anchor down Buffett's portfolio (US financials are 45.1% of BRK's public holdings before its Bank of America (NYSE:BAC) purchase). His purchase of Bank of America only adds to his disproportionate stake in financials.

Buffett's lack of exposure in technology, commodities, energy, or emerging markets will hinder his future long term performance. His only stake in any of these sectors are holdings of ConocoPhillips (NYSE:COP) and indirectly through Burlington Northern. This hurts Berkshire because the forces of globalization have left technology as one of America's few competitive advantages versus the emerging economies.

Also as the US and Europe fall into recession and continue to deleverage both in the private and public sectors, the emerging economies have become the world's drivers of growth. In addition, the debasement (and following inflation) of the US dollar benefits hard assets and foreign equities while hurting firms with domestic customer bases and insurance companies (people buy less insurance with lower real incomes).

With the reaction of Apple's (NASDAQ:AAPL) stock to Steve Jobs' resignation, Warren Buffett's increasing age should be a concern to Berkshire's investors. Even if the underlying assets lose little value, a loss of investor confidence in the post-Buffett Berkshire Hathaway will drive the stock down in a panic sell off. This may be a buy opportunity in the long run as the company is still well run, but the risk of Buffett retiring or passing away is growing more probable with time.

Overall, due to its overexposure in the stagnant financial and consumer goods sectors and a lack of investment in future growth driving industries, I believe that Berkshire will underperform the market as a whole. In addition, the possible diminishing of Buffett's role in the company with age is also a long term risk to consider.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.