For the second year in a row, Warren Buffett, the world’s best known investor, has underperformed his key measuring benchmark – the S&P 500.
By the end of trading for the year on New Year’s Eve, shares in his company, Berkshire Hathaway had risen just 2.41%, thanks to a solid 9.17% rise in the December quarter.
That was well behind the S&P 500 index which jumped 16.26% in 2020, including a 11.1% gain in the three months to December.
It was the second year of underperformance for Buffett and Berkshire. In 2019 Berkshire shares rose 11% and the S&P 500 surged by a massive 31.5%.
The last time Berkshire underperformed the market for two or more years was between 2003 to 2005.
While the 11.1% gain in the S&P 500 will mean Berkshire will have solid capital gains to report when it releases its December quarter and full year figures in late February, that is not Buffett’s focus, it seems.
The company’s continuing underperformance against the wider market and the difficulty of finding a well priced mega deal helps explain why Buffett and Berkshire have stepped up share buybacks.
Berkshire repurchased a record $US9.3 billion of its underperforming shares in the September quarter, taking the total for the first nine months of the year to $US15.7 billion.
The 4th quarter has already seen what appeared to be a further $US2.3 billion in buybacks because Berkshire’s share count dropped in October.
Led by a 27% surge in the value of Apple shares in the third quarter, Berkshire reported $US24.8 billion of gains from its huge share portfolio. The December quarter performance for Apple and other key stocks in his portfolio fell short of that gain. In fact Apple shares were up just over 13% or half the previous quarter’s rise but they were still up a substantial 76% for the year.
Because of the size of the Berkshire portfolio, the company’s net results are volatile because an accounting rule requires the company to report unrealised gains and losses on its stocks. The company posted a $US26.3 billion June-quarter profit, but lost nearly $US50 billion in the first quarter.
Despite the buybacks, Berkshire ended the quarter with $US145.7 billion of cash and equivalents. That was down slightly from $US146.6 billion at the end of the second quarter.
Of the September 30 figure, the insurance float (the net liabilities we assume under insurance contracts) “was approximately $135 billion, an increase of $6 billion since yearend 2019,” Berkshire said.
These will be closely watched in the February report, along with the annual shareholder letter.
At September 30, Berkshire had a share portfolio of $US228.9 billion with 49 stocks. 49.9% of the portfolio was invested in technology stocks (dominated by Apple), while the financial services sector has a weight of 27.1% (dominated by Amex and Bank of America) and the consumer defensive space represents 13.3% (Coca Cola and Kraft Heinz).
Buffett’s five biggest holdings accounted for over half of the share portfolio – they were Apple, Bank of America, Coca-Cola, American Express and Kraft Heinz. Apple accounted for 47.8% of the portfolio at the end of September.