- Easy money appears to have harmed Berkshire Hathaway's stock price returns over many years.
- Investors need to look back 20 years to see Berkshire Hathaway clearly outperforming the S&P 500.
- Warren Buffett has made it very clear that the S&P 500 is a very rational way to invest; written proof provided.
Buffett continues to be in a tough spot. We start with two reasons.
The first issue is that Buffett is pushing up against his cash hoard. He's holding too much money, and he's going against his words. From the 2017 Annual Meeting, he said:
"There's no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more, and we think we're doing something brilliant by doing it."
Even with another $6.6B in buybacks, Berkshire (NYSE:BRK.B) (NYSE:BRK.A) had $145.4B of cash and equivalents on the balance sheet as of March 31, 2021. That's up from $138.3B at the end of 2020. Again, the cash pile is growing faster than Buffett is willing to spend it.
The second issue is related to the first, namely that the macroeconomic environment is helping to push the stock market to higher highs. Money is being printed and pumped into the economy. Money is cheap. Money is all over and like water and it is seeping into all the nooks and crannies.
No One Is Gasping For Air
Buffett does best when there are weak hands and fear is in the air. However, what we've seen is a perpetual backstop by way of The Fed. It feels like every big business is getting bigger, and that everything is getting too big to fail.
We won't see much happen with Buffett's cash until more companies are gasping for air. Right now, the oxygen is freely flowing. And while Berkshire Hathaway itself might be a good buy at times, it's certainly not dirt cheap or in any way failing. Therefore, buybacks might be good for Berkshire, but not great. Perhaps it's a situation where Buffett's buybacks amount to investing in a great company at a good price. I can respect that.
The 800 Pound Gorilla: Opportunity Cost
All of these factors don't fully capture the situation. Yes, cash is stacking up. And, yes, Buffett is constrained. However, the bigger challenge might be the success of the market itself. We must consider the opportunity cost of holding Berkshire instead of the index.
Keep in mind that Berkshire is a single company. Sure, it's a conglomerate, and there is diversity directly cooked into the business. Nevertheless, it's just one business. This is all to say that Berkshire isn't the entire market and it's not a benchmark. Therefore, we can compare this business against the market to see how it's doing.
Importantly, we can check to see if Berkshire is superior to the market over time, specifically the S&P 500 Index (SPY). It makes little sense to let Berkshire off the hook because many investors like to treat it as a type of proxy for the entire economy, or even a better index than the index itself.
Therefore, it's instructive to find out when Berkshire has been a superior investment relative to the index. Putting it differently, starting from today, how many years do we have to go back where the Berkshire investor has beaten the index?
One Year Back
So, the first thing to realize is that Berkshire has kept pace with the S&P 500 (SPY). In fact, it's not hard to see that it edged out the market. We don't have to look back too far to find a win.
However, it's also rather clear that Berkshire only recently has outpaced the market. In other words, it was lagging behind but it did catch up and surpass the index just recently.
All in all, squinting a bit, either investment would have been satisfactory over the last one year. I don't see a runaway winner.
Three Years Back
Here we see that the index is superior to Berkshire over a three-year time span. The 67% versus 42% is quite a difference.
It's also instructive to look at the amount of time the index has been superior to Berkshire over this time. My eyeballs tell me that Berkshire was only ahead of the market about maybe 10-15% during this time span.
Five Years Back
Interestingly, Berkshire roughly tracked the market in 2017 and 2018 but then in 2019, the market really started to get ahead, comparatively speaking. In 2020, the market fell back down to Berkshire's level, but since that time we can easily see the index has been the winner.
10 Years Back
Once again, going back 10 years, it's clear that Berkshire roughly follows the index in general. It's borderline shocking how close. The breakaway, of course, was in early 2020. It's more evidence in this chart that COVID-19 "broke" the relationship a bit.
15 Years Back
Looking back 15 years, it certainly looks like Berkshire was a superior investment. Roughly speaking, I'd say Berkshire was ahead of the index perhaps 80-85% of this time span. Certainly, the outperformance wasn't Earth shattering, but Berkshire was nevertheless superior over this period.
20 Years Back
This is perhaps the most interesting view because Warren Buffett is clearly a long-term focused, buy and hold investor. Me too! Berkshire wins in the long term view, but it's a very long view.
Most Berkshire investors like to look at the entirety of the business. For example, this is from Page 2 in the 2020 Berkshire Hathaway Annual Report:
- Berkshire Compounded Annual Gain (1965-2020) = 20.0%
- S&P 500 Compounded Annual Gain (1965-2020) = 10.2%
It's obvious in the very long term that Berkshire has been the winner. There's no doubt about it. The numbers are etched in stone.
Sidebar on Dividends
Just to be perfectly clear, this is an analysis of price over time. Specifically, we're looking at the gains in price over various time frames.
Furthermore, I need to point out that this particular investment vehicle, i.e., SPY, pays a dividend whereas Berkshire does not. While the comparison here was about price, it's interesting that there is an opportunity with SPY to collect a little bit of cash along the way.
The current SPY dividend is a bit over 1.3% but keep in mind that the price charts above include that income. You're seeing "Total Return" so that's capital gains and the dividend combined.
The Big Picture
Squinting, and then roughly speaking, it sure does appear that S&P 500 index has been beating Berkshire in the more recent periods of time. Over the last year, it's been close. But, going back three years, five years and then 10 years, the market won. Furthermore, looking back at the last 15 years, Berkshire wins by a relatively small margin. It's only after looking back 20 years, or more, whereby Berkshire clearly wins. Frankly, that's a long time.
Bringing things full circle, it certainly seems like lower interest rates and easy money have made things quite a bit more difficult for Berkshire and a bit easier for the market. This is a well-run, world-class business up against a pervasive and systemic headwind. Until there is a serious downturn and money tightens, it's hard to see how Berkshire will competitively outperform the S&P 500.
I'll leave you with a final thought. It's all about listening to what Buffett is doing himself. Here's what Warren has instructed the trustee of his will:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
In other words, Buffett believes in the power of the S&P 500. It's extremely hard to beat the market. He's proven that's true, even for Berkshire.
None of this is to say the Berkshire is a weak company or poorly managed. It's also not meant to be a cry to sell or short the stock. Instead, it's more about comparing the benchmark to the business, and specifically the stock. There isn't some incredible imperative to get your hands on Berkshire stock, as if you'll miss out. But, likewise, there isn't some urgent need to sell either.
At this point in time, I can say that I think Berkshire is a great company and I have no plans to sell. In fact, it's an easy hold, and it provides a reasonable type of insurance against the impact of loose money. If there's blood in the streets and money dries up, Berkshire is ready to unload and buy like crazy. That works for me. I'll keep holding.
This article was written by
Analyst’s Disclosure: I am/we are long BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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