Warren Buffett‘s mistake with airlines is pushing Berkshire’s stock down while other things go up. This is such a reminder of 1999 when all dot-com stocks were exploding and Berkshire was down because Buffett was old fashioned. What we are seeing now is a similar situation with Buffett’s ‘HUGE’ AIRLINES MISTAKE haha. However, we take a look the investment vehicle Berkshire is and that explains the risk and reward of investing in Berkshire and why, in my opinion Berkshire stock will always outperform the S&P 500 index! We take a look at book values, equity compounding, valuation and cash flow – which is what Berkshire stock is all about.
The Odey Special Situations Fund was down 0.27% for April, compared to its benchmark, the MSCI World USD Index, which was up 4.65%. For the first four months of the year, the fund is up 8.4%, while its benchmark returned 9.8%. Q1 2021 hedge fund letters, conferences and more The Odey Special Situations Fund is Read More
- 1:56 - Investing risk and reward - getting rich slowly! Performance comparison with S&P 500 index.
- 10:36 - Buffett's airlines mistake is not really a mistake, just plain investing.
- 15:05 - Don't bet against America!
Berkshire Stock Will Continue to Compound and Beat the S&P 500 Index
Good day fellow investors. Last week Warren Buffett's conference and I made the summary video on it and it got more than 75,000 views. I thank you for those views and I especially thank you for those 2500-2400 likes, they're really appreciated, and really appreciate the support. But oh boy, oh boy, there were so many comments discussing, we'll touch also on that. Warren Buffett, is he too old? Should he retire?
The mistake with airlines, selling stocks underperforming the S&P 500 and all that chit and chattery that also pushed Berkshire stock down last week. So that's something very important to understand. And there are a few topics that I really want to discuss here that really are the core of what investing is versus anything else. And therefore, we will discuss the comments and touch on cash flows, on what investing really is, on risk and reward, especially comparing Berkshire to the S&P 500.
Why Berkshire? Even if many say it didn't outperform, it didn't outperform, will always outperform the s&p 500 and has destroyed it in the past. And then I also want to discuss the mistake of selling airlines. So much focus goes on the selling Airlines where Buffett lost $2 billion. So he lost $2 billion. Put that on a 500 billion equity. He lost What is that? 2 billion, 10%, 1%, he lost 0.05% of his portfolio. That is like you go for a cup of coffee.
That's what he lost, but everybody is attacking Buffett. That's what we have to explain. And then also touch on don't bet against America and selling airlines, which was one of the biggest comments and that we have to put into perspective.
Berkshire Performance Comparison With S&P 500 Index
Let's start with the discussion. So it's very simple. "Warren, your investing strategy is so simple, why doesn't everyone just copy you," is what Jeff Bezos asked. And Warren Buffett's answer was very simple because nobody wants to get rich slow. And if you want to get rich slow, please subscribe to this channel. This is where we get rich slow, perhaps a little bit faster. But we will focus on getting rich and that's about it. When we look at the comments,
Berkshire versus the S&P 500 old, outdated brain, I can't believe he saw the airlines. Buffett is just another market timer, time to retire. Still worshipping this last century man. And I think there were many comments about probably other billionaires that comment on Buffett because I wouldn't dare to make such comments until I am at least at his level. So probably these guys have all the same wealth as I think it's time to start accepting that the old man's wisdom is not any more valid in some aspects. He is still a renowned figure. But things change. Yes, things change, or things don't change and remain always the same.
Let's compare Berkshire the performance, the business, the returns, the investments with the s&p 500. And everybody's saying Berkshire didn't outperform the S&P 500 in the last 10 years. Okay, it didn't outperform, but investing is about the risk and reward and you'll see and about the long term compounding, and you'll see whether Berkshire outperform or not the S&P 500. And when you hear my perspective, please let me know in the comments, whether it is convincing enough to convince you to and to make you understand that it is about investing not about underperforming in the best bull market where everything when the tide lifts all stocks.
So let's start five year performance. It was pretty similar. So not much, not much difference until the last week, I think where the S&P 500 went up. And due to the negative comments, Berkshire didn't go far. So similar, we can still call it similar performance on 10 year performance.
Berkshire is the blue line, S&P 500 is the red line, similar. Also, if we go just a month back, the S&P 500 equal performance, and now there was some divergence as Berkshires stock went down and the S&P 500 went up. And the difference isn't that big a deal I think now. But okay, let's say Berkshire underperformed the S&P 500 in the last 10 years. Oh Buffett. Yes, you should retire.
Let's look a little bit more 15 year performance here, Berkshire clear divergence, especially during the bear market of 2008, and then later also but Berkshire 199% return, S&P 500 141% return over 15 years. If I go 20 years, Berkshire 355% return, S&P 500 just 90% return. So yes, that's the great index fund over 20 years but let's say okay, there was the dotcom bubble, so let's go further. 25 year performance Berkshire 1,000% that's 10x, the S&P 500 also good 468%. Let me go 30 years, Berkshire Hathaway 3,778% increase, S&P 500 still good at 747. But here we are already talking 4x. improved performance.
That's a huge difference. 40 years Berkshire Hathaway delivered 100,000% return, the S&P 500 2,700. In numbers that's 1000x on your investment 40 years ago in Berkshire and 27x in the S&P 500. That's a huge difference. It's 30-40 times out performing the market. But yes, there are a lot of geniuses saying that Buffett is old, outdated, but there are, as Bezos said, simple basic investment fundamentals that work always. And then there is the trend, the market, the chasing, the being smart. That's not something that Buffett does, and also not Berkshire.
Let me explain what Berkshire is and why I think that Berkshire even in the last 10 years, did better than the S&P 500. Because investing is about risk and reward. So let's look at the shareholders equity, Berkshire shareholders equity. 2005 it was not that much difference in 2009. So if you take a 10 or 15 year period here is equal, but went from $91 billion to $375 billion. That's the book value that Warren Buffett increased Berkshire's value over the last 10 or 15 years.
So the book value, your real returns, the equity went up 4.12 times or 10% per year. That's Warren Buffett. That is what he promised to do to increase book value, per 10% per year for a long term. And that's also what he's aiming to do now. And then if we look at the S&P 500 book value, it went from 414 to 1914. That's just 2.2x increase or 5.4% per year over 15 years. Yes, adds 2% dividend so we are at 7.4 return over time, 7.4 is much, much less than 10% that Buffett did.
So Berkshire shareholder equity up 4.12 times. And he will likely continue to do so over the long term. Because if you're investor you have Berkshire If not, you have the S&P 500. If you're more of a speculator because investing is about business, returns, book values, equities and compounding. So he will likely continue to do so because of this. The market capitalization is $422 billion. But if we look at the earnings, hidden and unhidden that we discussed in another video that you have to watch, if you're interested in investing in Berkshire, what are the real earnings Berkshire delivers, he will increase that book value by 32 billion in a normal year.
If we also deduct the cash of 124 billion, then the price earnings ratio of Berkshire is 10. Wow, the price of earnings ratio of the S&P 500 is 20. So Berkshire earns double what the S&P 500 is earning and is also growing because it's set up like that to grow.
So what do you want to own the S&P 500 at a valuation of 20, with all the hottest businesses in the world, good, great businesses too, but at double the valuation that Berkshire is at much less cash than Berkshire has. And Berkshire isn't doing crazy buybacks and spending everything like there is no tomorrow. They are a financial fortress. So risk reward, you have a higher yield but that's not interesting now in the market. Now in the market is all about growth and like it was always in all these bubbles. And you can Berkshire that's all about compounding that equity at 10% which is the core of investing. And let me show you this if Buffett would spend 100 billion like every other company in the S&P 500 is doing on buybacks. Ithink that the stock would double in the next six months.
If he announces, okay, I'm going to spend 100 billion on buybacks over the next year, we could see the stock double immediately and then forget all about the outperformance discussions because Berkshire would outperform the S&P 500 by double immediately in whatever period, if he would spend that on buybacks. But he's an investor, he wants to compound that long term cash that he has that equity to create real value not for speculators, but for his investors. So not speculating, but investing. That is what Warren Buffett does.
Buffett's Airlines Mistake
And then okay, he said it simply, it was my mistake, there was no more compounding. So we sold airlines, because he thinks they will chew up more money and that's not the investment he likes, and that are not the investments that are in his portfolio and that have led to the great performance. We have just shown. Let's see this 2007 Berkshire shareholder letter. The word sort of business is one that grows rapidly require significant capital to engender the growth and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright brothers. Indeed, if a farsighted capitalist has been present at Kitty Hawk, he would have done his successors a huge favour, but by shooting Orville down. And also Warren Buffett would have saved 2 billion, invested in something else, double that money.
So 5-10 billion would have been saved if someone shoot Orville down at Kitty Hawk. He also bought U.S. Air preferred stock in 1989, managed to sell for a hefty gain in 1998 when there was exuberance. This time, it didn't work. And then something very funny, he says, but I'll make more mistakes in the future, you can bet on that.
So investing is about making mistakes, accepting those mistakes, and simply continuing let's talk more about the investment mistake he just made and then put it into perspective. So his mistake, he put in 8 billion and let's say with the dividends he sold about 30% lower got some dividends 30-40% lower, let's say he got out 5 billion by selling everything. And he sold because it will not increase book value long term. No compounding, needs more cash, not an investment Buffett likes. So he prefers those investment that can compound and even a 2% difference of compounding over the long term which Buffett is doing leads to such returns. This is Sequoia example at all, I already showed but 10,002% difference is 1.4 million or 4.2 million in the very long term compounding on earnings and that is Buffett' focus. What is he looking for?
Where does he want to deploy his money? Let's see See's Candy bought for 25 million when sales were 40 million in pre tax earnings were less than 5 million. The capital required was 8 million to run the business. The company was constantly earning 60% pre tax on invested capital. Last year sales were 383 million, pre tax profits 82 million, and the capital required to run the business is just 40 million. After paying taxes. We have used the rest to buy the rest of the cash flow to buy attractive businesses. Just as Adam and Eve kick started an activity that led to 6 billion humans. See's has given birth to multiple new streams of cash flows. The biblical commands to be fruitful and multiply is one we take seriously as Berkshire.
And then let's see That's biblical command, how it works when it comes to investing. This is something I made for my free stock market course when summarising Peter Lynch, and let's look at an investment where you invest in 10 stocks. 10 stocks, let's say 2 go bankrupt, terrible mistakes 4 do nothing again, bad mistake. So you are you have made already 6 mistakes on 10 stocks, but then stocks number 7 doubles, triples gives you cash flows, stock number 9 quadruples, and stock number 10 in a period I don't know becomes a 10-bagger
. Let's say 10 years so you have made 6 mistakes out of 10. But you are still up to a point 3 times or almost 9% per year. And that is what investing is you have to simply cut to the losers and invest in those companies that will bring you more cash flows and allow for long term compounding that is what investing is and that's also what Adam and Eve are telling Warren Buffett and what he wants to do with his money.
Don't Bet Against America
Lastly comments about not betting against America but selling aircrafts. And here I really want to discuss how you should invest in the best businesses in the world. And that's what you're doing if you're investing in the S&P 500, if you're investing in America, Microsoft, Apple, Amazon, Facebook, Google, JNJ, Berkshire, Visa, all great businesses, global businesses. So if you're an investor and you go bet against that, and by betting, I mean, selling, timing the market, that's something that Buffett says, for most people is not something smart, because they will lose their shirt long term because these businesses will do good over time. There is no doubt about it. It's whether you will do good, great or enormously great, that's something else. But if you sell now, let's say I sell everything I'm betting against America, it's unlikely that you'll do better than what is the benchmark, in this case the S&P 500.
And I want to do a video on this so on Sunday I'll make a video why I'm not selling. Why I am buying stocks even if you have extremely high unemployment, even if the economic data is not good. And please subscribe, click that notification bell, and I'll see you in that video on Sunday. Looking forward to your comments. What do you think have I convinced you about what investing is against speculating in the market, against buying just stocks so that they go up? What is compounding? Let me know if I managed to do that in the comments below. Thank you and don't forget to click that like button.