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Berkshire Hathaway: It's All About Downside Protection

- By Rupert Hargreaves

I think it is fair to say that general sentiment towards Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.A) has deteriorated significantly over the past few years.

I have noticed a substantial uptick in the number of investors and analysts who are criticizing Warren Buffett (Trades, Portfolio) and the rest of the team at Berkshire, for their performance and some of their investment decisions since the financial crisis.

That being said, the recent annual meeting attracted a record number of visitors, so it is clear that not everyone has decided Buffett's time in the sun is over.

Lagging the market

Still, we can't ignore Buffett's performance since the financial crisis. Between 1999 and 2009, shares in Berkshire outperformed the S&P 500 by around 40%. However, since 2009, shares in the conglomerate have underperformed by approximately 30% excluding dividends.

I don't want to get into the reasons why the shares have underperformed. I think it is tough to pinpoint precisely one cause behind the underperformance. Berkshire's growth has failed to keep pace with the market-fast growing tech stocks, and there are also concerns about succession and some of Buffett's highest-profile investments in recent years have turned sour. Considering all of these factors, it is no surprise that the stock has underperformed. There has also been a lack of undervalued opportunities for the Oracle of Omaha deploy his giant cash pile.

Buffett has underperformed several times in the past, and each time there investors analysts have been eager to criticize. However, he has always persevered and come out on top.

Historically, when the financial media has started to criticize Buffett's performance, it has been a great contrarian indicator. We might see the same pattern this time around. Only time will tell.

I don't think investors should be focusing on Buffett's performance compared to the S&P 500.

Risk protection

Berkshire was never designed to be a fast-growing enterprise. The group's primary objective has always been to buy high-quality businesses at attractive prices and preserve capital. And that is precisely what the company has been doing for the past ten years and will continue to do so for the foreseeable future, in my opinion.

Seth Klarman (Trades, Portfolio), who I consider to be up there with Buffett in the list of the world's top ten value investors, frequently talks about how important it is to focus on risk reduction when analyzing investments. One of my favorite Klarman quotes on this topic comes from his book, The Margin of Safety:

"Many investors mistakenly establish an investment goal of achieving a specific rate of return. Setting a goal, unfortunately, does not make that return achievable. Indeed, no matter what the goal, it may be out of reach. Stating that you want to earn, say, 15% a year, does not tell you a thing about how to achieve it. Investment returns are not a direct function of how long or hard you work or how much you wish to earn. A ditch digger can work an hour of overtime for extra pay, and a piece worker earns more the more he or she produces. An investor cannot decide to think harder or put in overtime to achieve a higher return. All an investor can do is follow a consistently disciplined and rigorous approach; over time the returns will come."

In my opinion, it is imperative to keep this viewpoint in mind when considering Berkshire today.

Yes, the conglomerate might not be outperforming the S&P 500, but that's not the point. It is one of the lowest-risk stocks available on the market today, managed by one of the best business manager's of all time, who has a significant stake in the business and does not charge excessive management fees.

Berkshire is not an S&P 500 tracker. If you want to match the index, the best solution is to buy a low-cost S&P 500 tracker fund. However, if you are looking for steady long-term returns with a near-zero risk of permanent capital impairment, then Berkshire remains the best investment out there on the market by far.

Disclosure: The author owns shares in Berkshire Hathaway.
This article first appeared on GuruFocus.