Nearly four months into the COVID-19 pandemic, Berkshire Hathaway is seriously lagging behind the market. From Feb. 21 through Wednesday's close, shares of the conglomerate lost 21%, well behind the S&P 500's 6.7% decline. In fact, Berkshire Hathaway is now losing to the market -- or merely tracking it -- at pretty much any point over the past decade, as the chart below shows.
The results are enough to make longtime acolytes lose faith in Buffett and cast their Berkshire holdings aside. Pershing Square capital management chief Bill Ackman dumped his stake in Berkshire recently, saying there were better opportunities in the market. Edward Jones analyst James Shanahan told the Financial Times:
I am nervous that he may have missed this whole rally. ... That's frustrating. A lot of retail investors were plowing money into the market and doing better than professional investors. I think you can include Buffett in that.
CFRA Research analyst Cathy Seifert pointed to two particularly disastrous investments in Kraft Heinz and Occidental Petroleum, and called out Buffett's "chronic underperformance." Referring to tech companies and other growth stocks, Christopher Rossbach, chief investment officer of J Stern & Co. and a longtime Berkshire shareholder, said, "If Berkshire is to have the prospects of generating the value it has in the past, it has to adapt by buying these companies that will generate significant value over the next 25 years."
The coronavirus crisis has not been kind to Buffett thus far. Not only has Berkshire widely underperformed the broad market, but his decisions are being second-guessed. Buffet sold large stakes in all four major airlines, believing they now have structural deficiencies that will be difficult to overcome. In recent weeks, however, airline stocks have bounced off of their lows during the crisis. Other investors expected Buffett to finally deploy his $137 billion war chest with stocks plunging in March, but the Berkshire chief has held onto his cards so far. Buffett explained at Berkshire's shareholder meeting in early May, "We have not done anything because we don't see anything that attractive to do." Berkshire was actually a net seller during the crash, but Buffett did assure shareholders that the conglomerate was willing to do something "very big."
Blame it on the Fed
Bearish investors have roundly blamed the Federal Reserve for inflating stock prices in recent weeks, as the central bank has pumped trillions into the economy in the form of loans to sometimes troubled corporations. Indeed, it does seem incongruous that the stock market is back near all-time highs while the unemployment rate is at double digits and the coronavirus is still raging in a number of states. Buffett is far from the only one who thinks this rally is full of hot air, and he now seems to be acting on his advice of being fearful when others are greedy.
Buffett himself also noted that the Fed may have interrupted what could have been some juicy potential deals for Berkshire as the central bank essentially became a competitor. As he explained at the shareholder meeting:
We were starting to get calls. They weren't attractive calls, but we were getting calls and the companies we were getting calls from after the Fed acted, a number of them were able to get money in the public market. Frankly, terms we wouldn't have given to them.
Though the Fed may have neutered Buffett's ability to come in as a white knight, there's a bigger reason for the stock's underperformance during the crisis and its failure to beat the market over the last decade.
We're all tech investors now
Buffett is famous for his aversion to tech stocks, but the tech sector has crushed the rest of the market lately as platforms dealing with e-commerce, videoconferencing, and cloud computing have become essential tools during the pandemic. Though Berkshire is a major holder of Apple stock, the bulk of its portfolio is in sectors like financials, industrials, energy, and consumer goods, much of which have been hammered by the pandemic. That may explain Berkshire's sudden separation from the S&P 500.
However, the emergence of the tech sector isn't new, and one of the things that separate this recession from the last is that much of the market's value is in tech stocks as opposed to financials and energy. The five biggest companies in the S&P 500 -- Apple, Microsoft, Amazon, Alphabet, and Facebook -- make up roughly $6 trillion in market cap, or nearly a quarter of the S&P 500. And the pre-eminence of tech stocks in other areas has become readily evident as well. PayPal's market cap has surpassed that of Wells Fargo, a Buffett favorite. Netflix temporarily topped Walt Disney's market value, and Tesla is now the most valuable automaker.
Traditional value investing, Buffett's forte, has fallen out of fashion in favor of high-growth tech stocks. As the chart below shows, growth stocks have nearly doubled the returns of value stocks over the last decade, largely because of the emergence of the tech sector.
Has the Oracle lost his magic?
Buffett hails from the Silent Generation, the group of Americans born around the Great Depression, and Berkshire's portfolio seems befitting for a man who came of age in the postwar years. Its subsidiaries include somewhat antiquated consumer brands like Dairy Queen, See's Candies, and Fruit of the Loom, and its stock holdings are made up of companies Buffett grew up with, like Coca-Cola, General Motors, and American Express. Berkshire owns almost nothing, either as a stock or a subsidiary, that was founded in the last generation, although younger companies, like Alphabet and Facebook, have created much of the value in today's market.
The coronavirus crisis is far from over, and the market could crash again, setting up Buffett to bag an elephant or make a savvy deal like he did with Bank of America in 2011, netting him billions, but the tech sector's ability to withstand the worst impacts of the pandemic means it should continue to outperform the market as long as the virus is a weight on more sensitive stocks.
That means that Berkshire is likely to be a loser as the crisis plays out. Though a clever deal or blockbuster acquisition down the road could help redeem his performance during the crisis, his reluctance to own tech stocks puts him at a disadvantage, especially in the current ecosystem, which will only accelerate the growth of tech stocks and sub-sectors like e-commerce and online payments over the long term.
Buffett has long been an advocate of index funds, and investors may want to take his advice, as it's clear that owning Berkshire stock is no longer the escalator to riches it once was. On the other hand, an investment in an S&P 500 index fund -- with dividends reinvested -- would have nearly doubled Berkshire's returns over the last decade.