Where did Warren Buffett go wrong?
The answers will surprise you -- but they'll take some digging.
By James Brumley
It feels a little unnatural to criticize the icon of value investing, particularly when he's got a superior long-term track record. On the other hand, when arguably the wisest fund manager on the planet starts to trail the market's average performance on a regular basis, even the most patient of investors is going to start second-guessing the guy making the picks.
Between April 2011 and April of this year, Berkshire shares lost 2.4% of their value, while the market gained 2.8%. In and of itself, that disparity isn't a huge deal. But when it's the tail end of three years' worth of lagging performance -- during which the fund advanced 32% while the market gained 60% -- shareholders have to start asking some tough questions.
The most important of those questions also are the simplest: Which stocks aren't cutting the mustard, and what went wrong? The answers might surprise you.
Berkshire's biggest losers
The drag any particular stock has had on the portfolio really depends on the time frame in question. Some have lagged for three years, and some for only one. It's even trickier than that, though, as the portfolio always is changing, making it tough to pinpoint what lost what when. As for the biggest drags we can identify, though ...
- Bank of America (BAC): Berkshire doesn't own it any longer, but it was a fairly big holding back in 2010 that he sold in the fourth quarter of that year. Thing is, the stock had lost more than a third of its peak value from 2010 by the time fourth quarter rolled around. That said, note that Buffett still has a Bank of America position via preferred shares, which is doling out a pretty sweet 6% yield. The preferreds also are convertible into common shares at $7.14, but for the time being it's acting like fixed income.
- Bank of New York Mellon (BK): This was purchased some time in the third quarter of 2010, which initially proved to be good timing -- the stock bounced back from $25 then to a peak of $32 by the beginning of 2011. Unfortunately, it hit sub-$18 levels by October of last year, and he still owned most of it then.
- Wal-Mart (WMT): Buffett has had it for the whole three-year span. Though it was a minor position (about 3% of the whole portfolio), it still made no meaningful net progress between early 2009 and mid-2011, which didn't help his overall results.
- ConocoPhillips (COP): This probably is the biggest drag on the portfolio for the past year, as well as for the past three years. The stock has lost 31% for the past 12 months and has gained just about 19% for the past three years. Buffett acknowledged that he paid too much for ConocoPhillips.
Of those four names, Conoco probably would be categorized as the biggest letdown, even by Buffett himself.
Funny thing about all four of those stocks, though, even as Berkshire Hathaway's performance has lagged, it's not like any of those picks have been outright disasters. Rather, the mediocrity and sub-mediocrity from Berkshire since 2009 actually has been spread across most of its holdings, of all sizes, and in most sectors.
And there's something else. See any missing names? Don't forget that Berkshire Hathaway also outright owns Lubrizol, Burlington Santa Fe, Shaw, Johns Manville, Acme Brick and MiTek, just to name a few. It also owned a big bond position in Energy Future Holdings last year. Since these names aren't publicly traded, though, there's a bit of a challenge in determining the intrinsic value they represent to the whole company.
It's what you can't see that matters most
It's a reality that's rarely discussed about Berkshire's structure, but it's actually a fund (sort of) made up of both publicly traded companies as well as privately held ones. We can wrap our hands around the publicly traded ones pretty well. It's the privately held names here, however, that might be the biggest reason for the three-year struggle.
The construction names owned by the conglomerate illustrate the idea. Shaw (carpet), Johns Manville (insulation), Acme Brick (brick and tile) and MiTek (building products) together earned $1.8 billion in 2006. Last year, they collectively earned $513 million. How did this impact the intrinsic value of Berkshire shares? Great question. Their intrinsic value is only a theoretical one based on a multiple of earnings, unlike the publicly traded companies owned by the portfolio, which trade at finite values.
Over the past couple of years, Berkshire Hathaway also wrote down about $1.4 billion worth of the $2 billion investment in Energy Future Holdings. It was on the books, but buried in a mountain of accounting statements, and obscured by all the publicly traded stocks Berkshire holds. But clearly that markdown had an impact on the overall company.
So to answer the initial question, the reason Berkshire Hathaway has performed so tepidly since 2009 might have more to do with the companies you can't dissect, and less to do with the ones you can. Like any corporation, "what went wrong" was weak results. You just had to dig deep to glean that.
Warren Buffett remains a great investor, but he's not infallible.
What's interesting about the past three years is that Buffett paid dearly for a couple of the privately held companies that might be failing Berkshire now. Namely, he paid 31% more than the going price for the 2010 acquisition of railroad Burlington Northern Santa Fe, and offered a 28% premium for Lubrizol last year. And given the bids, odds are those are not the only businesses he overpaid for -- they and Conoco are just the ones we readily recall.
Simply put, when the man himself takes "value" out of value investing, lagging performance shouldn't be a surprise.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
I think many forget that investing is not defined by short-term returns by Buffett's dictionary.
It will be interesting to see how his successor will do with determining book value. Buffeet often compares his book to the S&P in regards to returns. His book is pretty large and difficult to determine. Whoever follows-up his position at BRK will have a hard time of selling the shareholders the book value. Most just hear it from Buffett, cannot really claim anything different and assumes they are not superior to Buffett (a farely safe assumption), and accept his statements. Then base purchases of shares on that. It will be a large issue of trust.
I agree with thinkforyourselvesabit. For instance, the construction related companies named (Shaw, Acme, Johns Manville) are long held companies. In that light, the title is a bit misleading. Buffett didn't go wrong with those. He is, as usual, looking long term and past the current blip in housing. Consider that Berkshire owns Benjamin Moore. Their cohort, Sherwin Willimas, just reported. You can look that up for yourself and assume Moore did likewise.
The Conoco purchase was a mistake. No way around that. In any case, Buffett himself has said the company has grown too large to expect the kind of returns he used to get 20 years ago.
Looking forward to the day they pay a dividend.
He goes political criticizing the amount of taxes the successful pay, knowing full well it's portrayed inaccurately......and wouldn't make a lick of difference towards the deficit.
All this while he's fighting the IRS over hundreds of millions in back taxes.
So to the naive and gullible, stop looking at this guy as if he has a halo over his head.
his second, recently said , that good people don't invest in old., they invest in productive businesses.
Apparently his second has some problems, also.
I bought gold in April of 2008 as soon as I saw we were going to elect a quasi socialist., either Clinton, or Obama, at $434 an oz.
Expect to see a huge crash in the next 8 to 9 months.
Buy Gold or Silver, hold it, Obama can't tax it until it's sold. Mine stays in Gold until the inept quasi socialist in the white house is history.
Buffett even named his son after Graham and calls Graham, his second greatest influence after his own father.
Anahin gives a comprehensive analysis of the stock market - all 4000 stocks listed on the NYSE and more - using all of Ben Graham's principles.
Honestly, we all know Buffet has grown senile in his old age. He won't name anyone to be his successor, he fund is trailing even what a cheap no load index fund could earn, and he keeps walking around muttering about his taxes are to low please take more money from me. That's not the signs of a brillant investor. Perhaps someone sufferin the first signs of an age related mental degradation. But not the great investor.
He can see the system is seriously flawed. And like all the other very rich, they're starting to get nervous. They worry about the people rising up against them one day. They can see the system is seriously flawed.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.