- Berkshire Hathaway’s cash pile is growing, and the reserves don’t look like they will be deployed anytime soon.
- Warren Buffett has been consistent with his investing philosophy, and this is frustrating to some.
- Buoyed by fleeting success, some Buffett critics think he is past his sell-by-date.
As Berkshire Hathaway (NYSE:BRK.A) lags the broader market, Warren Buffett has become an attack target of analysts and day traders.
The stock market has staged a remarkable recovery since 2020’s low three months ago. Buffett’s critics can’t understand why he’s sitting on the sidelines as Berkshire’s cash reserves accumulate to nearly $140 billion.
The newest financial Twitter sensation has also previously called Buffett “washed up” and declared himself the new “captain.”
Trump Points Out Warren Buffett’s “Mistakes”
President Donald Trump also criticized Buffett, suggesting he had made “mistakes” over recent investing decisions. This was after Buffett disposed of stakes in four airlines.
Some longtime Buffett acolytes also voted with their wallets. Hedge fund billionaire Bill Ackman dumped a $1 billion stake in Berkshire Hathaway, a decision that was announced last month.
Ackman claimed the proceeds of the sale would be deployed elsewhere. As of late May, Ackman’s hedge fund Pershing Square Capital Management was up 27%.
Are Buffett’s critics justified after their fleeting success in the last couple of weeks?
Berkshire Hathaway’s Performance in the Age of the Pandemic
Since March 23rd, when the S&P 500 index hit a low for the year, Berkshire Hathaway has lagged the broader market. The S&P 500 index has gone up by about 40%. Berkshire Hathaway, on the other hand, has only appreciated by around 14%.
Last year, Warren Buffett also lagged the broader market. While the S&P 500 gained 31.5%, Berkshire Hathaway went up by 11%.
Historically, Berkshire Hathaway has tended to outperform the broader market in bear markets and lagging during bull markets.
Day traders and short-term investors may gloat now that they are outperforming Warren Buffett, but for how long will this hold?
Why Warren Buffett Will Not Listen to Critics
In the annual letters he publishes, Buffett has occasionally revealed his stock-picking secrets. Four months ago, Buffett outlined three criteria for his investment choices:
First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.
Few stocks qualify under these criteria in the current environment. Buffett last month said he hadn’t come across anything worth buying.
Stocks are indeed highly overvalued relative to the strength of the economy. Their prices are soaring even as corporations continue to issue profit warnings and cut employee numbers. The market cap to GDP ratio currently stands at 148%.
This is above the level of 141% reached in 2000 at the height of the dot com bubble.
Time for Greed or Fear?
If history rhymes, Buffett may indeed have the last laugh. In 1999, a bullish year for the stock market, Berkshire Hathaway fell 20% while the S&P 500 surged by 21%.
The following year when the dot com bubble burst, the investing conglomerate rose 27% while the S&P 500 index fell 9%.
Day traders and analysts piling on Buffett may feel justified criticizing him for missing out on the rally. In the fleeting moments, they forget one of Buffett’s most famous quotes, “Be fearful when others are greedy and greedy when they are fearful”.
In the twilight years of his investing career, Warren Buffett has a legacy to protect. He cannot and should not listen to newly minted stock market traders experiencing beginner’s luck.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no position in Berkshire Hathaway.
Last modified: September 23, 2020 2:00 PM