Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and Warren Buffett are not only two names that are practically synonymous, but two names synonymous with successful investing. Berkshire stock hasn’t just beat the market since starting the business in 1964 — it’s embarrassingly crushed the S&P 500’s performance.
The secret to Buffett’s isn’t exactly a secret. He’s a value investor, and employs that approach with a fierce discipline.
At 86 years of age, though, Buffett has not only backed off on the amount of dealmaking he does for Berkshire Hathaway, he and Charlie Munger have (mostly) passed stock-picking torch to a new, younger dynamic duo of Todd Combs and Ted Weschler.
They are being groomed in the Warren Buffett way, of course, but when one takes a step back and looks at some of the decisions his appointed chiefs have made of late, it’s becoming clear today’s Berkshire Hathaway isn’t the great one investors came to know and love years ago. It’s not clear Berkshire stock is built to perform as well as it has in the past.
Things Are Changing for Berkshire Hathaway
To be fair, it’s all too easy to pick apart decisions and comments made by Berkshire’s people. The company and Warren Buffett are always in the public eye, and consistently required to serve up some sort of sound bite. It’s inevitable they’ll say or do something contradictory or inconsistent in their effort to fill the voids of silence. A couple of things said and done of late, however, have been alarmingly un-Buffett like.
Chief among them is the decision to take on a sizable stake in Apple Inc. (NASDAQ:AAPL). As of the most recent reported look, Berkshire Hathaway owned 133 million shares of AAPL, or roughly $19 billion worth of the consumer technology behemoth, doubling its stake from just two quarters ago.
It was a surprising buildup in a tech position simply because the Oracle of Omaha has eschewed tech in the past.
That’s fine. Things change, and Buffett is exactly right when he says that Apple makes consumer products that are very sticky … meaning iPhones are difficult to put down, and crowds always clamor for the next iteration. Buffett even seems to have his finger on the pulse of consumer sentiment regarding the iPhone, recently commenting:
“It’s very hard to figure out how much people delay their buying of iPhones because of the launch of a new one in six months… [But] a lot of people are waiting. If you knew a new car was coming out tomorrow … and you had to pay the same, roughly the same, I don’t know what they are going to sell the new [iPhone] at but close to the same for the last year model, you are probably going to wait.”
The mindset sets the stage for two key concerns, however.
One is, there will come a time when iPhone-mania hits a saturation wall, but Buffett (like so many other) isn’t acknowledging the secular-cycle nature of the popular product … something in the past he likely would have foreseen in other industries like air travel or railroads.
The other concern is, the suggested retail price of $1000 (if not more) for the next version of the iPhone isn’t exactly “close to the same” price as the newest iPhone is. As such, the release of Apple’s next phone may well coincide with the tipping point for Apple itself, where it transitions from a must-have investment to a can-live-without-it kind of stock, as consumers finally decide there’s too much of a premium in owning the newest iPhone.
And no, Buffett and Berkshire Hathaway may not see the end of iPhone-mania in time to do anything about it. One only has to look at how the investment fund mishandled International Business Machines Corp. (NYSE:IBM) as evidence that Berkshire’s brightest are anything but infallible.
In some ways one has to admire the willingness to stick with International Business Machines for as long as he has. Berkshire Hathaway began accumulating IBM shares six years ago, only to see it top out in April of 2013 and spend the next three years losing 40% of its value. Big Blue shares bounced back to roughly a breakeven between early 2016 and early 2017, and Berkshire used the move as an opportunity shed a third of its stake in International Business Machines. It’s still holding the other two-thirds of its stake, though, which has been back in freefall mode.
While Berkshire’s IBM position appears to have sidestepped becoming the disaster it could have been, one could argue Buffett — in violation of his own rules — never should have been in such jeopardy in the first place.
That rule? Never invest in a business you don’t understand. While the Big Blue of 2011 was in the server, hardware and enterprise software business that served as the tech heart and soul for thousands of companies, neither Buffett nor Berkshire adequately recognized how ill-prepared IBM was for the advent of cloud computing and mobile connectivity.
Granted, nobody really knew what the future would look like at the time. Berkshire Hathaway seemed to be one of the last to figure it out and accept it, though.
In that light, something Berkshire’s other icon, Charlie Munger, opined in a recent interview is considerably more salient:
“The worst business in the world is airlines. What do we appear in the press with? Apple and a bunch of airlines. I don’t think we’ve gone crazy; I think the answer is we’re adapting reasonably to a business that has gotten very much more difficult. I don’t think we have a cinch in either of those positions. I think we have the odds a little bit in our favor. And if that’s the best advantage we can get, we’ll just have to live on the advantage we can get. I used to say you have to marry the best person that will have you. And I’m afraid that’s a rule of life and you have to get by in life with the best advantage you can get. And things have gotten so difficult in the investment world that we have to be satisfied with the type of advantage that we didn’t used to get.”
He may have just inadvertently said “the Buffett way isn’t what it used to be, because it can’t be what it used to be.” Some of Berkshire Hathaway’s recent decisions and missteps seem to underscore this idea.
Bottom Line for BRK.A, BRK.B
Don’t misread the message. Even on its worst day, Berkshire Hathaway is still a better investment for the average investor than most any other stock.
On the flipside, sometimes change happens so slowly it’s almost imperceptible unless one makes a point of looking for it. When one peers at BRK.A and BRK.B through a different, more questioning lens, subtle changes start to appear. They may not all be for the better.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
