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Don’t Expect Underwhelming Returns to Force Warren Buffett to Retire

Last Updated September 23, 2020 1:37 PM
Mark Emem
Last Updated September 23, 2020 1:37 PM
  • Warren Buffett’s highly anticipated annual letter to shareholders is coming out on February 22.
  • The Berkshire Hathaway Chairman and CEO will be turning 90 in August.
  • In 2019 the S&P 500 outpaced Berkshire stock leading critics to say value-investing is dead.

Berkshire Hathaway (NYSE:BRK.A) is releasing 2019 annual results and Warren Buffett’s yearly letter to shareholders this weekend. Even before the numbers come out, the investing conglomerate’s performance relative to the broader market is in the public domain.

In 2019, Berkshire Hathaway underperformed the market. Year-to-date the same has been repeated.

Is it time for Buffett to retire?

Speculation has been rising about Berkshire’s succession plans as Buffett will be turning 90 later this year. He is now the longest-serving CEO of an S&P 500 firm  after Les Wexner quit as the chief executive of Victoria’s Secret-parent L Brands.

Warren Buffett
Source: Twitter 

Meanwhile, vice-chairman and long-time Buffett sidekick Charlie Munger is 96. At any other firm, the two would be fully retired.

But don’t expect Buffett to announce his retirement in the forthcoming annual letter. Unfulfilled ambitions and perhaps a lack of confidence in would-be successors will ensure Buffett hangs around longer.

Warren Buffett Successor not ready for prime time

The Oracle of Omaha has said that his successor will preferably be picked from within the investing conglomerate. Various media reports have tipped Todd Combs to succeed Buffett. Barron’s called him a “rising star” .

Berkshire Hathaway
Source: Twitter 

While Combs’ responsibilities increased this year to include running Berkshire’s auto insurance unit Geico, the size of the portfolio he’s responsible for suggests Buffett is not about to let go of the reins. Combs currently only handles $14 billion . For a firm boasting a $242 billion equity portfolio, that’s just 6%.

The market beats Warren Buffett

Between 1965 when Buffett took control of Berkshire Hathaway and 2018, the compounded annual growth  of the investing conglomerate was 20.5%. This was more than double the 9.7% return of the S&P 500 over the same period.

After years of continuously beating the market, Buffett seems to be losing his touch as growth stocks trounced value stocks.

In the last 12 months, the S&P 500 index is up over 20%. Berkshire Hathaway’s Class A stock has appreciated by around 10%. Year-to-date the S&P 500 is up 3.3% while BRK has virtually broken even.

Todd Combs
The S&P 500 is currently outpacing Berkshire Hathaway stock.| Source: TradingView 

Some critics have opined that the value-investing strategy employed by Buffett has failed. Would Buffett quit now when he could wait a little longer to prove critics wrong? Possible but unlikely.

About that “elephant-sized” acquisition…

In last year’s annual shareholder letter , Buffett announced he was still gunning for an “elephant-sized acquisition.” That is yet to come. Instead, Berkshire expanded its holdings of marketable securities as its cash hoard swelled.

Until Buffett makes another signature investment, his stay at the helm will continue. As he put it, “just writing about the possibility of a huge purchase has caused my pulse rate to soar.” This is what Buffett lives for. Walking away from one final adrenaline rush that will secure his legacy is unlikely.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.