Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) is widely considered to be not only the best investment vehicle, but also one of the safest.
With $100 billion of cash on the balance sheet and a stable of businesses across various industries and sectors, Berkshire has more in common with an index fund than a single company, with the added bonus of cash on the sidelines ready to make a substantial deal if and when the opportunity presents itself.
Berkshire's shareholders are also able to invest alongside Buffett, who is considered to be the greatest investor to have ever lived.
Recently, however, Berkshire Hathaway's performance has been overshadowed by the growth of tech stocks. Indeed, Mark Zuckerberg is now set to overtake Buffett on the world's rich list (not that Buffett has ever counted).
What is fascinating is the fact that as tech stocks have grown in popularity (and grown earnings), they have helped the S&P 500 overtake Berkshire Hathaway's performance. In fact, over the past five years, the S&P 500 total return index has returned 91% compared to Berkshire Hathaway's 70%. If we go back 10 years, the performance gap is a less severe 20%, with a gain of 170% for the S&P 500 total return index and 150% for Berkshire Hathaway.
Underperforming
The recent performance of the S&P 500, which has been driven by the performance of FANG stocks, has weighed on Berkshire's record of beating the index.
This is an interesting development. Historically, Berkshire Hathaway's edge has been in bear markets. Buffett's cautious attitude toward investing has enabled him to be greedy when others are fearful, taking advantage of down markets to snatch up bargains. And this edge is more than likely to continue. With $100 billion in cash to deploy when the next downturn arrives, Buffett can act quickly and decisively to snatch up the best bargains on offer.
Tthere are, however, several issues to consider in this debate. First, there's the question of whether or not Berkshire has become too big. While other companies are much bigger, historically, the company has relied on acquisitions to drive growth. Berkshire's size today means that it needs more significant deals than ever before to move the needle. These deals are few and far between, especially in today's market, where many companies are fully valued. That said, Berkshire tends to make these deals in bear markets, so it depends on what happens in the market going forward.
Another point in the debate is whether or not Berkshire is out of touch with today's tech-focused world. Berkshire's portfolio is full of old economy companies such as BNSF, utilities, banks and insurance. These still have a place in the world, and will likely continue to produce returns for Berkshire for many years to come, but the real growth over the next several decades will come from autonomous transportation, machine learning, fintech and renewable energy.
We know Buffett is trying to branch out into the new economy. His sizable investment in Apple (AAPL, Financial)Â and attempt to buy a stake in Uber show he's well aware of the changing world. It might be the case that, in the next downturn, when opportunities present themselves, Buffett will focus his elephant gun on the tech sector.
Long-term investment
These arguments have been made before. Berkshire usually underperforms (or matches the market) during bull markets. It is during bear markets that the company has an edge, and this is only really seen over market cycles. Berkshire still holds the title over the S&P 500 for long-term performance. Go back two decades and the stock has doubled the return of the index.
I do think, however, there's something in the argument that Berkshire has missed out on the tech revolution. Based on Buffett's move to make Apple his largest holding, and the association with Uber, he seems to have realized this himself (notably, he's refrained from investing in tech until this point).
Whether or not it will hurt Berkshire for good remains to be seen. Only time will tell, but I bet the insurance conglomerate hasn't lost its edge just yet. Buffett is just waiting for the next right, large opportunity to present itself.
Disclosure: The author owns no stocks mentioned.
