Please ensure Javascript is enabled for purposes of website accessibility

Is This What's Holding Berkshire Hathaway Stock Back?

By Dan Caplinger - Oct 13, 2019 at 10:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors aren't all happy about the Buffett-led company's performance, but there might be another force at work.

Warren Buffett has been at the helm of Berkshire Hathaway (BRK.A 0.03%) (BRK.B 0.00%) for decades, and his track record there makes him one of the most successful investors in history. His long-term performance is nearly unmatched, and those who've stuck by the Oracle of Omaha over the years have gotten big rewards for their loyalty.

Yet recently, Berkshire has underperformed the broader market by a significant margin. In 2019 alone, Berkshire stock is up just 1%, compared to a nearly 17% rise in the S&P 500 index. Although there are undoubtedly many different factors at work to explain Berkshire's underperformance, there's also a key factor that many investors don't even realize is happening that could have a dampening effect on the stock's upward price moves.

Berkshire, Buffett, Bill Gates, and big gifts (and sales)

It's been 13 years since Warren Buffett announced that he would give away the lion's share of his fortune gradually over the course of the rest of his lifetime. The Berkshire CEO started out with an initial gift of Berkshire stock worth $1.5 billion, and from there, annual gifts came at regular intervals. For instance, earlier this year, Buffett gave away roughly 16.8 million Class B shares of Berkshire, worth roughly $3.6 billion at the time. The bulk of those shares -- about 12.8 million -- went to the Bill and Melinda Gates Foundation.

Warren Buffett, with several photographers and others around him.

Image source: The Motley Fool.

Meanwhile, for the Gates Foundation, having huge holdings of Berkshire stock has been an excellent source of funds. Rather than selling off in one fell swoop the large blocks of stock that it receives as donations, the Gates Foundation has instead made regular sales of shares. For instance, in the first quarter, Gates Foundation holdings of Berkshire B shares dropped by 5 million. Another 5 million B shares got sold during the second quarter.

Downward pressure on the stock?

The pace of the Gates Foundation's sales isn't so large that it would have an immediate and obvious impact. Average daily volume for Berkshire amounts to roughly 4 million Class B shares. If you assume equally spaced sales happening constantly during the quarter, 5 million Gates Foundation-held Berkshire shares would equate roughly 80,000 to 85,000 shares per trading session. That's just 2% or so of typical volume.

Neither does it appear that Berkshire's particular niche has done poorly this year. Financial stocks broadly are up almost as much as the S&P 500, and many prominent insurance companies have actually beaten the market, let alone Berkshire's returns.

The likely answer

Yet longtime investors in Berkshire have seen this story play out before. From time to time, Buffett's philosophy simply doesn't lead to favorable short-term results. Shareholders have to endure a period of underperformance -- sometimes extreme -- that calls into question Berkshire's entire way of investing. Eventually, though, fundamentals reassert themselves and Berkshire's stock catches up to its peers.

For me, that first round was in the late 1990s. Buffett refused to invest in go-go internet stocks, and his returns suffered. When the tech bust of 2000 to 2002 hit, Berkshire's businesses were rock-solid, and the stock clawed back the ground it had lost during the 1990s bull market.

The same thing happened to a more limited extent on several other occasions. From 2003 to 2005, Berkshire dramatically underperformed, but better performance in 2006 through 2008 helped to offset its earlier lagging returns. Berkshire has also seen isolated poor years, such as 2015, but they've often gotten followed by big gains like the stock enjoyed in 2016.

Don't miss the big picture

It's always frustrating when a stock you own doesn't do as well as the market -- especially a stock that's as well-known as Berkshire Hathaway. But if you give up hope just because of a year or two in which a stock trails broader stock indexes, you'll often miss out on the gains that result when Berkshire's mode of investing comes back into style.

Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$457,400.01 (0.03%) $122.52
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$304.27 (0.00%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
394%
 
S&P 500 Returns
127%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.