There's no denying that the past couple of years have been relatively disappointing ones for Berkshire Hathaway (BRK.A -0.57%) (BRK.B -0.42%) shareholders. Stock in the Warren Buffett-led multinational conglomerate has soundly outperformed the broader market since its inception (as we know it) in 1964. But since the end of 2018, the S&P 500 index has gained nearly 48%, while Berkshire is up less than 12%. The fund has also merely -- and uncharacteristically -- matched the broad market's performance over the course of the past 10 years.
Before jumping to sweeping conclusions about a bleak Berkshire future, though, take a breath and take a step back. This stock is still a great pick for pre-retirees looking to build a nest egg, and it's still a solid pick for retirees who have room in their portfolios for a non-dividend-paying growth holding.
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Berkshire Hathaway's subpar performance
It would certainly be easy to fear the worst. At 90 years old, Warren Buffett is certainly no spring chicken. Much has changed about the market since he began using the textile company called Berkshire Hathaway as a holding vehicle more than five decades ago. Everything moves much faster now, and it's more difficult to identify the value he's sought out for so many years.
One also has to wonder how much stock-picking Buffett is actually doing these days. Apple has been Berkshire's biggest stock holding for some time now, in conflict with the Oracle of Omaha's long-standing stance that he won't own a company he doesn't fully understand. That's largely been technology stocks -- mostly growth names, which have led the overall market for several years.
Except, comparing Berkshire's results in recent years to the broad market's performance is in itself an unfair comparison. The past few years have decidedly rewarded growth stories rather than actual earnings, at the expense of value stocks that continue to crank out cash regardless of the environment. The idea bears out in the data. The iShares S&P 500 Growth Fund has outperformed the iShares S&P 500 Value Fund by a margin of more than two to one since 2014.
This weakness hits Buffett's value-focused strategy close to home, in a manner of speaking, but it's not a permanent headwind.
Environmental change afoot
Superficially, the disparity makes sense. Growth names are by definition meant to offer growth, even if that also means greater risk and more volatility. Value stocks, on the other hand, offer more reliability and impose less risk.
Largely lost in the noise of the recent growth-stock mania, however, is how growth and value names take turns leading the market. Not once in the modern market era have value stocks as a group failed to eventually catch up with gains from growth names.
Not once.
It's also worth mentioning that cyclical periods of leadership (and laggardship) can last for several years, as has growth's leadership since 2014.
That's not to suggest value's rebound and growth's demise is slated to materialize in 2021. It is to say, however, that it's likely to happen sometime. And for retirees or near-retirees playing the odds, it's likely to happen sooner than later. That's when Berkshire and Buffett's acolytes should really start to shine as they have in the past.
Berkshire's most unique edge is still intact
As for Buffett's day-to-day involvement in Berkshire Hathaway's stock-picking, he's probably not all that involved anymore. He and Charlie Munger appear to have mostly passed the torch to Todd Combs and Ted Weschler, while relatively new board members Ajit Jain and Gregory Abel have been pegged as potential successors to Buffett. They all bring their own viewpoints to the table, which seemingly poses a threat to Berkshire's long-standing investment approach.
This sort of style drift need not be a major concern for current and prospective retirees, however.
For good or ill, Warren Buffett has become bigger than life -- a rockstar investing icon almost everyone respects, even if they don't follow his advice. It would be difficult for any manager or Berkshire chief to assume such a role and not strive to continue doing what Buffett himself would most likely do. The Oracle of Omaha's legacy is worth keeping alive.
Then there's perhaps the most overlooked (but most important) nuance of the Berkshire Hathaway portfolio -- it's not all stocks. The fund only owns about a quarter of a trillion dollars' worth of the same equities any other investor can own. But it's got around twice that amount's worth of privately owned, cash-generating companies like See's Candies, Duracell batteries, GEICO auto insurance, Pampered Chef kitchenware, Acme bricks, and more. These are makers of consumer goods that people tend to buy over and over again.
This is the sort of flexible, cash-driving portfolio that allows any manager to prioritize bigger-picture value creation. Not only does Berkshire not have to worry about stock price volatility for those organizations, it can buy, sell, and manage companies as needed so retirees don't have to worry about doing the same.
Bottom line
It's admittedly tough to keep faith in what Buffett and his proteges are doing when it feels like they're underperforming the overall market. As the old saying goes, though, things are always darkest before dawn. Berkshire Hathaway is still unlike any other investment opportunity out there, even if it can take years for it to pan out and pay off. Retirement planning should focus on the years ahead rather than months or even weeks.
