On Wall Street, few, if any, investors are revered as much as Warren Buffett. The CEO of Berkshire Hathaway (BRK.A 0.58%) (BRK.B 0.38%) has been an absolute stock-picking dynamo since the mid-1960s, with his company's 2019 shareholder letter noting that Berkshire's per-share market gain over the past 55 years is a cool 2,744,062%. And, no, that's not a typo. If you had invested $100 into Berkshire Hathaway at the beginning of 1964, you'd have more than $2.7 million by the end of 2019.

Buffett's no-nonsense style of long-term investing has worked wonders, and it's led to an average annual return of 20.3% over those past 55 years.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.

Warren Buffett has substantially underperformed the S&P 500 over the past 10 years

However, Buffett's luster hasn't shone as brightly over the past decade. On a trailing 10-year basis, through June 20, Berkshire Hathaway stock had gained 126%, which isn't anything to sneeze at. Comparatively, though, the benchmark S&P 500, which Buffett has run circles around for decades, was up almost 201%. That's a 75-percentage-point underperformance for the Oracle of Omaha.

Why has Buffett delivered such underwhelming returns, relative to the benchmark S&P 500, over the past decade? While I believe there to be three key reasons, I'd like to point out that there are some explanations that simply don't hold water.

For instance, some people have suggested that Buffett has lost his touch. While it's important to understand that no stock-picker is perfect, Buffett has certainly not lost his touch. For instance, Berkshire Hathaway's investment in Apple has swelled to almost $88 billion in total value. This means, on an unrealized basis, and not accounting for dividends, Berkshire Hathaway has gained in excess of $50 billion on its position. In other words, Buffett still knows how to spot value hiding in plain sight.

The underperformance of Berkshire Hathaway also shouldn't be pinned on Buffett's recent unwillingness to make a major acquisition. It's been more than four years since Berkshire closed its buyout of Precision Castparts, the last so-called "needle-moving deal" that Buffett and his team made. As a result, Berkshire Hathaway's cash hoard has surged to an all-time record of $137 billion. Since this cash isn't generating much income due to historically low lending rates, some will argue that Buffett has cost Berkshire Hathaway the opportunity to put this capital to work.

To this I'd contend that Buffett has earned the right to be picky about the company's he and his team acquire. Few businessman are as excellent at vetting buyout candidates as Warren Buffett, and I certainly wouldn't peg his company's underperformance of an unwillingness to chase a potentially overpriced deal.

What I will blame Buffett's underperformance on are the following three factors.

Four pots with progressively larger money-based plants growing out of them.

Image source: Getty Images.

1. Buffett prefers value stocks, but growth stocks are primed to shine in this economy

The first issue for Buffett is that he's a tried-and-true stickler for value. According to a Bank of America/Merrill Lynch report that examined growth stocks versus value stocks over the 90-year period between 1926 and 2015, value stocks were the clear outperformer (17% versus 12.6%).

But these roles have reversed since the financial crisis more than a decade ago. Historically low lending rates and exceptionally dovish Federal Reserve policy that's featured all sorts of unconventional quantitative easing has made access to capital easy and cheap. While this can favor mature, value-oriented businesses that Buffett tends to gravitate toward, a low lending rate environment is best-suited to be a shot in the arm for high-growth stocks looking to innovate, expand, and possibly even acquire.

Mind you, this isn't to say that Buffett doesn't have growth stocks in his portfolio. Historically, Apple and Amazon certainly fit the bill. But keep in mind that not all of the 46 securities held in Berkshire Hathaway's investment portfolio were added by Buffett. Amazon is a high-growth e-commerce and cloud service company, but it was added by one of the Oracle of Omaha's investment lieutenants -- not Buffett.

A biotech lab technician using a multiple pipette tool to add liquid to test tubes.

Image source: Getty Images.

2. The Oracle of Omaha's scope of research is limited

Another pretty big reason for Buffett's underperformance over the past decade is the Oracle of Omaha's limited scope of research. This is to say that Buffett predominantly focuses his attention on a small number of sectors, such as financials and consumer staples.

On one hand, having this core focus on only a few sectors has made Warren Buffett exceptionally good at identifying value within these areas. He's made no secret that bank stocks are his absolute favorite place to park Berkshire Hathaway's money. Over the past decade, Buffett has built up a nearly 10% stake in the likes of Bank of America and U.S. Bancorp.

But on the other hand, Buffett's unwillingness to expand his research to include other sectors can mean overlooking revolutionary businesses. For instance, in 2020, some of the top-performing companies (on a year-to-date basis) are cloud-service providers or those involved in telemedicine. Buffett rarely, if ever, invests in healthcare because he doesn't have the time or resolve to stay up on clinical studies or U.S. Food and Drug Administration rulings. Similarly, technology that Buffett can't easily understand tends to be avoided.

With tech and biotech shining over the past decade and Buffett stuck to banks and consumer staples, he's simply been riding a lagging horse.

A person holding a magnifying glass over a company's balance sheet.

Image source: Getty Images.

3. Buffett is used to evaluating businesses with hard assets in an increasingly digital world

A final reason Buffett's performance hasn't been up to snuff in recent years is because his methods of evaluating businesses aren't always applicable to today's companies.

Since Buffett is a big fan of banks and brand-name companies, it should come as little surprise that his evaluation process often involves analyzing a company's hard assets. By this, I mean Buffett takes into account the value of property, plant and equipment, inventory, and other tangible assets that can help him make a determination if a company is truly "cheap."

However, some of the top-performing companies in the technology sector over the past decade have been asset light. With business increasingly moving into the cloud and becoming digital, Buffett's old-school way of evaluating a balance sheet no longer works across all industries and sectors. I'd suggest that this makes it very difficult for the Oracle of Omaha to properly value high-growth businesses, especially in the technology sector.

But, just to be clear, even though Buffett has had his shortcomings over the past decade, I personally wouldn't dare bet against him succeeding over the long run.