Berkshire Hathaway: Warren Buffett Still a Market Master

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Every time Warren Buffett does something human, people start questioning whether the Oracle of Omaha has lost his stuff.

warren buffett berkshire hathaway stocksIf Warren Buffett makes a mea culpa over a bad investment or Berkshire Hathaway (BRK.B) fails to beat the S&P 500, almost invariably we’re treated to discussions of how he may have lost his mojo.

Maybe it’s a fun question to bat around in the way baseball fans argue about a power hitter, but it’s not very useful — and it’s not even clear what people are complaining about.

A recent piece in The New York Times explained just how uncommonly good an investor Warren Buffett is from a statistical perspective. It’s nearly impossible to beat the market over any extended length of time, and yet from 1965 through the end of 2013, Berkshire Hathaway outperformed the S&P 500, including dividends, by 9.9 percentage points annualized.

That performance is so extraordinary that it puts Warren Buffett in a super-elite pool, one that holds less than 1% of the population of investors, according to a new statistical analysis of Warren Buffett and his long-term record at Berkshire Hathaway.

Okay. It’s nice to have a way to yardstick Warren Buffett’s almost incomparable skill, but so what? We know he’s good.

The part of this statistical analysis getting all the attention is the one focusing on how Warren Buffett and Berkshire Hathaway have lagged the S&P 500 in four of the last five years. Statistically, there is only a 3% chance that this underperformance is due to bad luck, says Salil Mehta, the author of the study.

Warren Buffett and Berkshire Hathaway may have stumbled a bit in the last few years when benchmarked against the S&P 500 on total return, sure, and that’s bound to attract attention. But Warren Buffett’s investment style is actually designed to do that to a degree.

Warren Buffett has said plenty of times that Berkshire Hathaway will tend to lag when the S&P 500 is putting up scorching-hot gains — as it did from 2009 through 2013. Berkshire Hathaway will also hold up better when the S&P 500 is in a tailspin. That’s how it’s built. Limit the downside and the upside will take care of itself.

A few years of subpar returns don’t prove anything. Call it a slump, but there’s no proof that it’s an irreversible late-career swoon.

Warren Buffett Keeps Delivering on EPS

Just as importantly, there’s another — perhaps better — way of comparing Warren Buffett and Berkshire Hathaway’s performance against the market during this post-crash bull market. And by those figures, the market is getting smoked.

Warren Buffett has said that as Berkshire Hathaway has grown, oftentimes he has been opting to buy up entire companies rather than buying stakes in publicly traded ones. That means the long-term wisdom of these decisions may not be fully reflected in Berkshire Hathaway’s annual data.

That’s an important point, especially when it comes to intrinsic value, which is what investing like Warren Buffett is all about.

As Forbes recently noted, Berkshire Hathaway has so many wholly owned subsidiaries (and stakes of companies that are so large that they are accounted for on an equity basis), it makes comparing Berkshire Hathaway’s share-price performance to the performance of the S&P 500 a bit of an apples-to-oranges problem.

Looked at this way, the only proper way to compare Berkshire Hathaway to the S&P 500 is on an earnings per share basis (EPS).

Guess what? On an EPS basis, Warren Buffett and Berkshire Hathaway are clobbering the market over the last five years. From 2009 through 2013, Berkshire Hathaway earnings per A-class share (BRK.A) increased from $5,189 to $11,850 — a gain of 128%. Over the same period, EPS plus dividends for the S&P 500 gained 82%.

The S&P 500 gained more on a price basis though this period only because the market assigned its earnings a higher multiple. That says more about market sentiment on Berkshire Hathaway than it does about fundamental performance.

Maybe that’s because Warren Buffett is getting closer to the end of his career, and so the market is discounting the risk to a Berkshire Hathaway without him by paying less for earnings. It happened to Apple (AAPL) when Steve Jobs announced his illness.

Regardless, over the long run, earnings are supposed to be the ultimate driver of share performance. According to the bottom line, Warren Buffett hasn’t lost a step. It’s the market’s appreciation of this fact that has fallen behind.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/warren-buffett-berkshire-hathaway-2/.

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