Where did Warren Buffett go wrong?

The answers will surprise you -- but they'll take some digging.

By InvestorPlace May 7, 2012 9:33AM

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.


And that's exactly what's happening now with Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) investors.


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.


Bottom line

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.


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May 7, 2012 6:53PM
TR Rose - You're right, you don't have Buffett's problem.  You do appear to have a fact problem.  A learned viewer would know that Buffett, a huge Democrat supporter BTW, has already given the majority of his wealth to the Gates Foundation.  His own children are expected to earn their own way in the world and not rely on daddy's wealth. Thanks for trivializing the discussion. Have another sip of koolaide.
May 7, 2012 9:29PM
No one is "infallible," but the key is winning more than losing. Everyone laughed at Warren Buffet when he picked up everything under the sun in 2008. They said he was crazy, or losing his edge, but he won and won big. When he won, people said that he was taking advantage of the less fortunate, or being predatorial, but the reality is, sometimes it's lonely at the top. You lose either way in the eye of the common man, therefore, you put a smile on your face and do your thing. Win! Winning has its value because few do it. Simple economics, the demand is high for it and the supply is very low. 
May 7, 2012 10:02PM
He is like the honey badger...  He don't care what ya say....
May 7, 2012 2:52PM

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.

May 7, 2012 7:11PM
BUFFET is to consummed with paying his FAIR SHARE OF TAXES!!!!  He has lost his focus.
May 7, 2012 6:48PM

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.


May 8, 2012 9:29AM
he went way wrong when he started backing that socialist oboma.
May 7, 2012 10:22PM
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. 
May 8, 2012 9:59AM
Buffett is no different than any other greedy wall street salesman. He'll recommend a stock for you to purchase, while shorting it in the back room.

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.

May 7, 2012 10:41PM
May 8, 2012 10:25AM
what has the people that wrote this letter done that can remotely add up to anything that buffett has done they sit back and do nothing until somebody takes a risk and does something great
May 7, 2012 9:08PM
Really think Buffet may be suffering from early onset Altzheimers..
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.

May 12, 2012 12:47PM
Ben Graham was Warren Buffett's mentor and the founder of value investing.
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.
May 8, 2012 4:38PM
First, I will be happy to take investment advice from anyone on here who has amassed the kind of wealth - and returns - that Warren Buffett has achieved.  Has he made mistakes?  Absolutely, and he will be the first to say so.  Are there years when Berkshire underperforms?  Again, absolutely.  However, taken as a whole, I do not think there is anyone else who even comes in a close second to his accomplishments.  As for gold (and I hold some), I just got back from the annual meeting and that question was asked and answered.  When Buffett took over Berkshire, the stock was roughly $15 and gold was $35/ounce.  Today, gold is around $1700 and the same Berkshire stock is $120,000!  As Charlie Munger stated, "I'm not too fond of any investment that only pays off if the world goes to hell!"
May 8, 2012 11:19AM
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. 

May 8, 2012 10:36AM
buffet is   alear  jet  liberal......  a  coc-------   thru   and  thru.
May 7, 2012 11:45PM
Open-mouthed He didn't couldn't spend his money. That is so sad.
May 8, 2012 8:19AM
to stupid spruce ;(you hanger) on repubs haven't learned yet.  you don't know even what quasi means. and what does this article have to do with the pres any way. and if you bought gold at 435 and you are telling people to buy at this ridicules price( you are nuts).  republican greed is killing america and the market. wait until the repubs take all your rights away. you will have your rusty guns to keep you warm. you might want to sit on the barrell and pull the trigger. and by the way i think buffet is cool and a lot smarter than you. and since you brought up politics vote for barrett in wisconsin to day.
May 7, 2012 6:41PM
Maybe he's looking to put his billions somewhere safe? We, the 99% American People, don't have that problem; ours is simple IT ALL GOES FOR  the corrupt Republican OIL corporates GASOLINE and what's left IS FOR FOOD FOR OUR FAMILY!! Thank goodness we don't have his worries!
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