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The Berkshire Hathaway Stock Picking Approach May Be Too Out of Touch

James Brumley

Congratulations to investors in Berkshire Hathaway (NYSE:BRK.B, NYSE:BRK.A). Since the late-December bottom, BRK.A and its far-more-affordable counterpart BRK.B stock are up nearly 9%.

Those who’ve been holding either Berkshire Hathaway stock for more than a few months, of course, will know that even with the big bounceback from the December low, Berkshire has been an underperformer. The S&P 500 index, for perspective, is up 23% from its late-December low. Indeed, both BRK stock classes have lagged the broader market more often than not over the past decade, and have underperformed for the past 12 months by about half..

There are two schools of thought on the matter. One of them has it that the relative weakness is a temporary matter, and given enough, the “the Buffett way” will win out. The other holds that unless Warren Buffett is executing it himself, “the Buffett way” may not be what it used to be.

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Too Many Ill-Advised Picks

To quantify the qualitative, the index and the stock pretty much pace each other coming out of the financial crisis. The S&P 500 is up 324% since the March-2009 bottom, while BRK.B stock is up 343% for the 10-year stretch. Yet a closer look shows Berkshire has been behind since January 2018, when a seemingly uninterruptable rally was abruptly uninterrupted.


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The broad market’s lead has been widening over the past three months.

It’s not difficult to figure out why Berkshire Hathaway has been a relative disappointment. As of the end of the first quarter of 2017, coming off the shocking upset-election, Berkshire’s two biggest holdings were Kraft Heinz (NASDAQ:KHC) and Wells Fargo (NYSE:WFC), both of which have notably underperformed since then. Not even the market-beating gains from the fund’s third-biggest position at the time, Apple (NASDAQ:AAPL), have performed well enough to offset weakness seen in many of Buffett’s other holdings. Apple is now the fund’s biggest holding, but Wells Fargo and Kraft Heinz are still key pieces of the portfolio, with Berkshire’s top stock-pickers unwilling to cut bait.

Coca-Cola (NYSE:KO), the fund’s fourth-biggest position right now and a long-term holding, has also trailed the S&P 500 for years.

Those results prompt questions, chiefly about the effectiveness of Buffett’s buy-and-hold-forever, value-minded stock-picking regimen. Does it still work? For that matter, are Buffett and his acolytes — Todd Combs and Ted Weschler — actually following Buffett’s well-established rules? Several months isn’t forever, but it’s certainly not a short period of time either.

Food for thought: Maybe it’s something else altogether.

The Game Has Changed

Buffett’s rules are not only well-established, but easy enough to follow. Buy what you know. Be greedy when others are fearful, and fearful when others are greedy. Take outsized positions in the right opportunities.

The approach certainly made sense when the Oracle of Omaha was espousing it. BRK.A and BRK.B stock have the long-term results to prove it.

Since early 2009, though, Berkshire and the S&P 500 two are essentially tied in term of performance for the 10-year stretch, Berkshire has actually trailed the broad market more often than not. That is a long time.

What gives?

It’s a reality investors with some gray hair will fully appreciate, but the market environment has changed dramatically over the course of the past 20 years. More specifically, the way investors and traders see and approach the game shifted.

The starkest among those shifts? Two decades ago, value and earnings prospects meant everything. Now, the ‘story’ is the key, as investors are essentially placing bets on how other investors will price the progress of a story at some point in time in the future.

The ideas are nothing new; there’s always been a pinch of story-driven thinking in the market’s ether. That mindset supplanting profits as permanently as it has as a yardstick, however, is a relatively new phenomenon.

And there’s nothing in Buffett playbook for that kind of environment.

One only has to look at Wells Fargo’s recent history to recognize it. Despite its account opening scandal, revenue growth never stopped, and operating income — all things considered — held up reasonably well and is back on the mend. Yet, WFC stock is falling back toward new multi-year lows.

Kraft Heinz is another case where ‘buying what you know’ hasn’t helped Buffett. He clearly knows and likes the simplicity of the food business, and the Velveeta maker certainly qualifies as one of the ‘wonderful companies’ Buffett recommends sticking with — it’s one of the most recognizable brand names in the world, and it’s still turning a nice operating profit.

KHC stock is down more than 60% from its mid-2017 high, however.

See, there’s nothing in the Buffett rule book that explains how to handle a cultural shift that favors smaller niche brands, combats persistently high delivery costs, deals with distributors that also become competitors, and offsets the impact of multiple trade wars. Most investors can’t handle such a setback.

Perhaps, for the worst, ‘the market’ has become far too complex for Buffett’s simple rules. There’s more psychology and sociology in play than fundamentals.

Bottom Line for BRK.B Stock

It’s only a thought exercise, to be clear, but still a good one.

Many traders remain bullish on BRK.B stock believing it will be able to achieve its pre-2009 returns with or without Buffett at the helm, but that may or may not be the case. At 88, Buffett may be unwilling or unable to update his approach to adapt to a market that’s treated more like a casino table than a means of plugging into profit potential.

That’s not to say his strategies and insights no longer have any value. It is to suggest, however, there may be a reason his approach has been decidedly ineffective for a decade now.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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