<p>This may be the crisis Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) chairman Warren Buffett was waiting for. Investors looking for an easy way to play decimated sectors may see Berkshire Hathaway shares as a steal among coronavirus sales. After all, there is no one in the world who is better positioned to buy the dip than Oracle of Omaha.
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Berkshire closed in 2019 with a fantastic $ 128 billion in cash and the company wants to make a big splash. Buffett wrote in last year’s shareholder letter that he was looking for an “acquisition of elephant size”, and the market is perfectly suited to his needs right now.
In the past, high market values, at least from the perspective of Buffett and partner Charlie Munger, made such an acquisition impossible. With the S&P 500 now 22% down so far in 2020, Buffett can find his elephant at the price he wants. But that does not mean that the Berkshire Hathaway share is a buy in the falling market.
Berkshire is a laggard
An important concern with the BRK.A share right now is that Berkshire has long underperformed in this bull market. Berkshire Hathaway is doing slightly better than the market so far in 2020, but with 18%, shareholders have not exactly found solace in BRK.A.
During the bull market, however, the Berkshire Hathaway stock simply did not keep pace. Over the past decade, BRK.A has modestly topped the S&P 500. But add to dividends, and investors would have won 170% in the index and only 121% in Berkshire’s stock.
To be fair, Berkshire’s wholly owned business suggests that the stock should probably underperform in a bustling market. Above all, the company has huge insurance companies – among them the car insurer Geico – that do not benefit from financial strength to the same extent as other companies.
But there are also a lot of highly cyclical companies under Berkshire’s ownership. Railroad Burlington north of Santa Fe is due to demand for goods (and more recently oil). The prospects for a specialty chemical such as Lubrizol are uncertain – peers such as Dow (NYSE: DOW) and LyondellBasell (NYSE: LYB) have plunged into this market. Precision Castparts, a supplier to an aircraft manufacturing industry, is under significant stress. Berkshire is not exactly a defensive warehouse.
Even in the short term, Buffett’s insurance business faces potentially higher claims from the coronavirus impact. And so it is not surprising that it has fallen along with the market as a whole. (However, it is worth noting that Geico may benefit. Buffett himself recently noted that his claims fell sharply.)
It is also not surprising that Berkshire underperformed on the way up. Buffett was notoriously late to tech. And while he now has a huge stake in Apple (NASDAQ: AAPL), he missed the huge growth winners in the bull market.
Berkshire Hathaway is too big
To be fair, that does not mean that Buffett and Munger have lost touch. There’s a core problem with Berkshire that Buffett himself acknowledged – more than two decades ago:
“The highest rate of return I have ever achieved was in the 1950s. I killed Dow. You should see the numbers. But I invested in peanuts then. It is a huge structural advantage not to have a lot of money. I think I can earn you 50% a year on $ 1 million. No, I know I could. I guarantee it. But you can ‘t put $ 100 million or $ 1 billion into something that’s so far. “
It’s still a problem. Only today is Berkshire not trying to unite $ 1 billion. It tries to put together over $ 300 billion.
According to Form 10-K submitted to the US Securities and Exchange Commission, Berkshire’s equity portfolio was worth $ 248 billion at the end of 2019. That size prevents Berkshire from owning non-controlling interests in all but the largest companies.
Hunting for an elephant
But Berkshire’s size also limits potential growth even if Buffett and Munger find their elephant. This is a company with a market capitalization that is still over $ 400 billion, even after the recent downturn.
Suppose Berkshire can spend all of its $ 128 billion on a monster acquisition. (Wouldn’t Disney (NYSE: DIS) make sense?) And suppose it could generate 10% or even 20% in incremental value from that deal.
A maximum of about $ 25 billion in value is still created. It does not sound like peanuts. But that is only about 6% bump to the market value of the Berkshire Hathaway share.
The same problem applies if Berkshire executives – including key lieutenants Todd Combs and Ted Weschler – want to buy this market dip. Again, their universe is limited.
Investors can do better than Berkshire Hathaway shares
As Buffett himself said in 1999, this is not true for most investors. Individual investors have the whole market to invest in. And I still believe, as I have repeatedly argued during these sales, that these investors have a huge opportunity in the future.
In fact, the volatility index (VIX) has only been as high as it is now twice before – during the financial crisis of 2008 and back in October 1987 when the Dow lost 22.7% in one day. Investors who bought the bottom (or even those who were too early) saw big gains in the following years.
I think history will be repeated. And in that environment, Berkshire Hathaway stock will rise as well. Barrons estimated on Friday that the equity portfolio has shrunk by about $ 50 billion so far this year. When the market recovers, the portfolio will recover these losses … and the BRK.A and BRK.B shares will both rise.
But individual investors have better opportunities out there. I have recommended Facebook (NASDAQ: FB) as a victim of an unjustified sale. Luckin Coffee (NASDAQ: LK) has a huge opportunity in China and a cheaper valuation. Cannabis stocks continue to fall amid large market declines, but the long-term growth in that industry should be spectacular.
Individual investors can and should do their own due diligence. They should find their own opportunities. They are plentiful. The long-term “megatrends” I have long cited – 5G wireless, artificial intelligence, even cryptocurrencies – remain intact.
There are a plethora of stocks to play these trends. Almost all are much cheaper than just two months ago.
The problem for Berkshire is that it cannot invest in most of these stocks. Its large size means that it has to focus almost exclusively on massive, mature companies. This is not where the opportunity is right now. And that’s why investors who want to choose stocks in this declining market can do better than Berkshire Hathaway stocks.
Matthew McCall left Wall Street to actually help investors – by getting them into the world’s biggest, most revolutionary trends FOR anyone else. The power to be “first” gave Matt’s readers the chance to bank + 2,438% in Stamps.com (STMP), + 1,523% in Ulta Beauty (ULTA) and + 1,044% in Tesla (TSLA), just to name a few . Click here to see what Matt has up his sleeve now. Matt does not directly own the above-mentioned securities.