Warren Buffett and Berkshire Hathaway are now paying the price of avoiding growth stocks and gold. The eventual successor must be different.
Berkshire Hathaway (NYSE:BRK.A) Chairman and CEO Warren Buffett epitomizes the value-investing strategy better than anyone else.
Lately, though, Buffett’s investing philosophy has come under scrutiny after years of underperformance.
The investing strategy has seen the conglomerate concentrate most of its efforts in financials, utilities, and energy while ignoring faster-growing sectors. The underperformance relative to the broader market is consequently getting worse. Last year, Berkshire Hathaway gained 11% against the S&P 500’s 31.5%.
So far this year, Berkshire has declined by about 13% while the S&P 500 is down by less than 2%.
Now with over five decades as the head of Berkshire Hathaway, it is probably too late for Warren Buffett to change his investing ways.
In the past few weeks, evidence of Buffett’s inflexibility has been apparent. The Oracle of Omaha has, true to style, shunned unfamiliar high-growth opportunities while adding to the ‘old economy’ stocks and assets.
Early last month, Berkshire Hathaway shelled out $9.7 billion to acquire the natural gas assets of Dominion Energy (NYSE:D). Additionally, the investing conglomerate spent at least $1.7 billion to increase its stake in the Bank of America (NYSE:BAC).
These investments in “old economy” assets have been made at a time when the market has been offering better returns in other sectors.
Major tech stocks have proven to be recession-proof amid the pandemic. Recent earnings reports from some of the largest tech companies in the world bear this out.
In the second quarter, Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOGL) all beat earnings estimates.
Apple increased revenues by 11% from the same period a year ago. Earnings per share grew 18% over the same period. Amazon’s sales surged by 40% while net profit doubled. Facebook’s revenues rose by 10% year-on-year.
By mid-July, Netflix (NASDAQ:NFLX) had recorded 25% year-over-year growth in revenue.
Other tech giants recorded similar or better growth. Microsoft (NASDAQ: MSFT) saw its revenues rise by 13% on an annualized basis. Chipmaker Advanced Micro Devices (NASDAQ: AMD) recorded 26% growth in revenues annually.
Many other examples in the tech sector abound, proving that Berkshire Hathaway’s stance to stay away from tech stocks (except for Apple and a little bit of Amazon) needs to be reevaluated.
Tech companies recorded impressive growth at a time when the U.S. economy shrank 32.9% annually, the fastest on record.
Warren Buffett once said about gold:
It doesn’t do anything but sit there and look at you.
According to the Oracle of Omaha, gold is a bad investment since it doesn’t generate earnings or pay dividends or interest.
The yellow metal is up nearly 30% since the year started. Berkshire is meanwhile down by… you know the story.
In times of massive cash infusion and zero interest rates, such as now, gold continues to play its rightful role as a store of value and a hedge against inflation. Gold hit an all-time high in July and now sits just a short distance away from the $2,000 an ounce mark.
In choosing a successor, which has become a fixation at Berkshire’s company events now, the conglomerate’s board would do well to avoid a Warren Buffett clone. The world has changed, and a new approach to investing is needed.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.
Last modified: September 23, 2020 2:10 PM