Berkshire Hathaway stock has underperformed the S&P 500 for the past decade. By a recent calculation Berkshire’s stock has risen by nearly 260% versus the market’s more than 300% advance in the decade ended in 2018. Despite Berkshire’s stunning record since 1965, 21% compounded annualized gains, this is not the first time that the company’s shares have underperformed the market for a decade. It’s happened several times in recent years. This weeks guest: “The advice is stay put, and then you’ll get the returns from the S&P because 90 percent of the investors in the S&P 500 funds don’t earn the return for that fund because they’re out when the market is most cheap, and they’re overexposed when the market is too expensive.” Are Berkshire Hathaway’s best years behind it? Great investor and long-time holder, Tom Russo responds.
Tom Russo: Investing In Berkshire Hathaway
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
Berkshire Hathaway has consistently been one of his largest possessions. I asked Russo given Buffett's modest expectations for the stock's future performance. If he is rethinking the position.
No, I think the number one issue that investors obtain benefits they obtain through investing in Berkshire Hathaway is the extraordinary lack of agency costs. Berkshire Hathaway is by far and away the most efficient investment in public works as one could have in aligning the interests of the shareholders with managers and and within the S&P 500. That continuum would be stretched awfully thin. It's largely because within the S&P 500 most of the companies that you find there have a very serious relationship with stock options which unfortunately in terms of the way businesses unfold narrows and shortens the time horizon of investment decisions.
There were those in most S&P if I don't come get a lot of stock options tremendous incentive therefore here is incentive to jack up the stock short term is to think short term.
The average CEO 10 years four years maybe five years and the whole system is built around smooth and steady reports for the near term with the disregard for the long term. And then there's a sequence of that rolling through these S&P 500 all the time. Now initially a little alignment of equity alongside of salary was a good thing. But as Warren Buffett often says the mistakes on Wall Street are good things taken to an extreme and within the S&P 500 it's rife with agency costs. And so within Berkshire that's entirely solved. Berkshire does nothing but try to develop an intrinsic value per share basis. Investments that increase that measure. That's it. There's no other side games right. On the other side games whatsoever. And with that I am entirely content to leave close to 13 or 14 percent of my investors funds exposed to that to that enterprise let as it's been by such extraordinary talent but but set up the right way to succeed when there's a shift in talent because it's a structured that set up to align interests.
Right. As I alluded to in my introductory remarks two years is that if you look back at trailing tenure year period several of them the Berkshire is underperform the S&P 500. Yes. Now if you buy an S&P 500 type of index yes which of course Warren Buffett has recommended that many people go to. Yes you've got much broader diversity. And and so why wouldn't I invest in an S&P five index.
It's a very good question. I think Warren's message has some some deeper complexity to it than what it seemed on the surface. What he's really saying to all whom he advises invest in the S&P 500 if their decision maker parts the parts the scene and they're left to make decisions that they aren't familiar with his advisors go to the S&P because it be very hard for you to find any person who would handle your money without self dealing. It's again I question of agency costs. Right. So the first point behind the S&P 500 is make sure that you go to the yes you have unravelled a selection of portfolio covers because those will be churned and as their churns they will eat either up your money into commissions for the for the intermediary. Now within within the S&P 500 you at least however get productivity of America right more and we tell you that actually backing America has been the winning trade for over 250 years and that will continue. Now I submit that as I said at the start yes you get that you get the benefit of corporate America deluded by options and the mistakes that are made by the failure for companies to invest enough but at least within the S&P 500 you're not subject to the grabbing of your assets by and by. This is by interested intermediaries. Right. And then the last thing he says stay in it because you never sell out right. There's a chance if you come out you will you will as a lay person inevitably find yourself within the S&P world mortgaging your house to get more money to throw at the S&P when it peaks and you'll be clearly sold out at the bottom. So the advice is stay put and then and then you'll get the returns in the S&P because 90 percent of the investors in the S&P 500 funds don't earn the return for that fund because they're out when the market is most cheap and they're overly overexposed to the market's too expensive. That combination will then keep some bonds on the sides have something to live with.