Warren Buffett’s Berkshire Hathaway

Warren Buffett, often referred to as the Oracle of Omaha, has amassed one of the world’s biggest fortunes of over $70 billion through his company Berkshire Hathaway. His incredible wealth is the result of Berkshire’s soaring stock price over decades. Owning his stock though, similar to any stock, can often test an investor’s patience as it may be doing today for some.

It’s been a disappointing 2020 so far for Berkshire shareholders as the following graph shows. Not only did the stock fall with the rest of the market in February and March, it has failed to recover much of those losses while the market’s indexes have rallied sharply. Year-to-date Berkshire remains down -20.7% while the S&P 500 is off just -4.1% and the NASDAQ is higher by double digits! This is clearly a disappointment for Berkshire shareholders but nothing that hasn’t been seen before.

Source: www.YahooFinance.com

Two to three months of disappointing performance is sometimes difficult for many investors to deal with. These are the times to remember that all great performing investments go through periods of outperformance and underperformance and sometimes very long periods. Weathering through periods of underperformance such as we’ve seen in 2020 has paid off handsomely for long-term investors as the following graph shows. One dollar invested in this stock in early 1980 is now worth $941. This is how you amass a fortune! The same dollar invested in the S&P 500 and NASDAQ Composite is worth $30 and $71 respectively.

Source: www.YahooFinance.com; Patton analysis

As mentioned above, Berkshire’s 2020 year-to-date underperformance is not entirely uncommon. One of the more extreme for Berkshire was at the height of the tech bubble in 1999 and early 2000. During the 15 months from the start of 1999 through the market high on March 24, 2000, Berkshire was down -22% while at the same time the S&P 500 gained +24% and the NASDAQ surged +126%!

Source: www.YahooFinance.com

Losing faith in Berkshire at the market top in 2000 would have been miserable timing. The below graph shows the performance from the top of the market in March 2000 through Friday’s close. During this more than 20-year period the S&P 500 and the NASDAQ Composite both rose about 100% while Berkshire surged more than 400%! Clearly investors exercising some patience during the underperformance during the relatively short 15 months of 1999 and early 2000 were extremely well rewarded over the next two decades.

Source: www.YahooFinance.com

It’s impossible to know what’s next for Berkshire. There are many things that are different today than 20 years ago for Berkshire but there are many things that may be much the same. Value-oriented investors such as Warren Buffett have been out of favor in recent years lagging behind higher-growth stocks. If history though is any indication, this market cycle will likely shift as it has many times in the past and possibly reward long-term Berkshire Hathaway shareholders.

This Week’s Performance Highlights

Source: www.YCharts.com

Stocks generally moved higher around the world in what some investors are now calling a rebound week as it seems we are going from one week where everything falls followed by another where everything rebounds. This has not necessarily been the market’s exact behavior but we are certainly seeing days of across-the-board buying and other days of broad-based selling.

Helping propel the markets early in the week was more detail from the Federal Reserve about one of their previously announced bond-buying program. The central bank has set aside $250 billion to buy existing corporate bonds of companies that were investment-grade rated as of March 22nd and have durations of no more than 5 years. These guidelines are much broader than some had originally anticipated and will provide support to a wider swath of the bond market instead of only the most distressed bonds.

Economic Indicators

Retail Sales surged a record +17.7% in May following a -14.7% record drop the month before. This month’s sales gains were more than twice what economists had forecast as consumers returned auto dealership, where sales up +44% for the month, and shopping malls to spend their money.

Source: https://fred.stlouisfed.org – Advance Retails Sales: Retail and Food Services, Seasonally Adjusted

As of the end of May, total sales are down just -7.9% from their February high and off only -6.1% compared to the same month a year ago. The big question of course is what happens next. Retailers said sales have been helped by government stimulus which may have run its course. Continued strength will likely require a strong recovery in the jobs market which has yet to fully materialize.

Industrial Production, a key measure of manufacturing, mining, and utilities, came in +1.6% higher in May after falling by -12.5% the prior month. This recovery was not nearly weaker than expected and lagged the surge in retail sales by a massive margin. Even after May’s gain production remains -15.4% below its pre-pandemic level in February. Economists expect this recovery to continue but, given the current data, the recovery may look more U-shared instead of V-shaped.

Housing Starts disappointed coming in at an annualized rate of 974,000, up from last month’s 934,000 but well below estimates of 1.13 million. Across the country results were very different with the West and Northeast, those areas hit hardest by COVID-19, seeing big gains while numbers fell in both the Midwest and South. There is reason to believe the housing market will continue to improve with permits to build new homes up +14.4% and applications for mortgages hitting an 11-year high.

Jobless Claims inched lower for the week to 1.51 million from 1.57 the week before but were well above forecasts of 1.35 million. The total number of people receiving claims, known as continuing claims, also was just slightly lower than the prior week now at 20.54 million. This data is not improving as rapidly as many had originally hoped.

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