Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), may well be the greatest investor of our generation. Berkshire Hathaway's 2019 annual shareholder letter notes that, since 1965, the company's share price has risen by a compound annual rate of 20.3%. That compares to a 10% compound annual gain, inclusive of dividends paid, for the benchmark S&P 500. This 10.3 percentage-point annual difference may not sound like a lot, but it's allowed Buffett to outperform the broad-based index by over 2,700,000% since 1965.
What's been truly amazing is that Buffett isn't using some under-the-radar software or insider information to outperform the market. Rather, he's simply locating businesses with sustainable competitive advantages and holding on to them for very long periods of time. This patience is what's allowed the Oracle of Omaha's net worth to compound in recent decades.
He's also made his fair share of mistakes in 2020, although you might not realize it. Here are three of what I view as his biggest blunders this year.
He sat on the sidelines during a once-in-a-decade sell-off
Easily the action bound to draw the highest amount of criticism in 2020 is Warren Buffett's lack of activism during the five-week massive sell-off that occurred between Feb. 19 and Mar 23. In that span, the S&P 500 lost a peak of 34% of its value.
In Buffett's defense, no one can accurately predict when stock market corrections will occur, how long they'll last, or how steep the drop will be. Perhaps he simply believed the stock market had more downside to come. But what stands out as a glaringly bad decision is the fact that Buffett and his team bought very little during a more than 30% plunge in equities. For context, the stock market only dips 30% about once every decade.
It would appear that Buffett is attempting to atone for his inaction in recent months by getting more aggressive on the purchasing front. Since the beginning of the third quarter, Berkshire Hathaway has purchased over $2 billion worth of Bank of America stock; acquired natural gas transmission and storage assets from Dominion Energy for $9.7 billion, inclusive of debt, and spent approximately $6 billion buying 5% stakes in five of Japan's leading trading companies.
While it's encouraging to see Buffett putting some of his company's record $147 billion in cash to work, the investor who prides himself on being greedy when others are fearful missed a prime opportunity to pick up great companies on the cheap in March.
Berkshire is paring down Wells Fargo when it's arguably a prime purchase candidate
Though entirely debatable, it's a head-scratcher that, after 30 years of holding Wells Fargo (NYSE:WFC) stock, Buffett and his team are choosing 2020, a year where bank stocks like Wells Fargo have been throttled by the coronavirus pandemic, to substantially reduce their exposure. Last week, a regulatory filing showed that Buffett's company sold an additional 100 million shares of Wells Fargo, reducing its stake to 137.6 million shares, down from 479.4 million shares in March 2017.
If I had to guess, I'd opine that there are two reasons behind this big-time selling. First, the pandemic-induced recession is going to constrain the interest-income earning potential of banks for years to come, and Buffett might simply view the investment as dead money. The other possibility is that he may have lost faith in management following an authorized account scandal at the branch level that became public in 2016-2017.
While I can somewhat understand these reasons to sell, they make little sense for long-term investors. A share of Wells Fargo can be had right now for 63% of its book value. Over the past 30 years, there was only a one-week period in March 2009 where the company's price-to-book value has been cheaper.
Furthermore, Wells Fargo has a history of producing superior return on assets, relative to other big banks, and it's always had a knack for attracting affluent clientele. These well-to-do clients are less likely to change their spending habits during periods of economic contraction, and they'll often use multiple financial services.
In other words, selling Wells Fargo now looks like a big mistake.
Buffett hasn't scaled back his company's mammoth stake in Apple
The Oracle of Omaha's final error of 2020 has been not paring back his company's position in technology kingpin Apple (NASDAQ:AAPL), which has grown to account for half of Berkshire Hathaway's invested assets.
I'm well aware the previous statement probably sounds a bit crazy. After all, Apple has been a top-notch performer since the March 23 bottom and is a big reason Berkshire Hathaway's portfolio has shaken off the poor performance of the company's bank stocks. But having half of its invested assets tied up in a company that's being valued like a high-growth services stock doesn't make a lot of sense.
Apple CEO Tim Cook has been pretty clear that he envisions Apple becoming a services company, with an added focus on wearables and accessories. The reason? Services are usually subscription-based, which tends to yield juicy margins and predictable cash flow with little customer churn. If services become the predominant sales generator for Apple, sequential-quarter revenue recognition would probably be less lumpy.
But through the first nine months of fiscal 2020, services account for just 19% of Apple's sales. Yet the company is being valued at an aggressive 31 times next year's earnings. Even factoring in the bump-up in sales expected with the unveiling of a 5G-capable iPhone, this multiple is far and away above Apple's historic forward P/E over the past decade.
If you want to talk about a stock that's a candidate to see its valuation run in place for a while, it's Apple. Buffett's unwillingness to even modestly reduce Berkshire's stake in the company may come back to haunt him in the near term.