Berkshire Hathaway holds immense significance due to its size and symbolic role in American business. With a market capitalization exceeding one trillion dollars, it ranks as the 11th most valuable company in the United States. The ten larger firms are all technology companies, many of which have been propelled recently by artificial intelligence or Elon Musk's influence. Berkshire represents an older, more cautious, and far-sighted form of corporate capitalism, grounded not in technological upheaval but in enduring economic principles. At a time of market frenzy, Berkshire's example is crucial.
The Challenge to Berkshire's Model
However, the notion that the Berkshire model excels in long-term value creation is increasingly hard to defend. Comparing its rolling ten-year total returns with the S&P 500 shows that Berkshire consistently outperformed the index only until mid-2012. Since then, the two have traded leads, with the S&P gaining when investor optimism is high, as now, and Berkshire slightly edging ahead when sentiment weakens, as in April of last year. Essentially, this has been a 14-year stalemate, which is becoming a long period even by Berkshire's standards.
A New Era Without Buffett
Warren Buffett, renowned as both the greatest investor and the most charismatic corporate leader of his time, stepped down as CEO six months ago, succeeded by Greg Abel. This transition prompts a renewed question: what is the purpose of Berkshire beyond its symbolic value?
Berkshire as a Low-Volatility Investment
One straightforward but somewhat dull answer is that Berkshire offers lower volatility than the S&P 500, benefiting risk-sensitive investors. Ironically, Buffett has criticized equating volatility with risk, which he defines as the danger of loss. Additionally, Berkshire pays no dividends, making it more tax-efficient for investors who do not require income. Thus, Berkshire can be viewed as a no-fee, low-volatility, tax-efficient mutual fund unlikely to significantly outperform or underperform the S&P 500 over extended periods.
This is not a trivial recommendation; it describes a product many would want to own. Yet, is it sufficient given Berkshire's legacy? Is matching a passive index while saving on taxes the best that fundamentally driven, patient, and principled investing can achieve? This prospect is disheartening if true.
Berkshire's Performance Resembles an Insurer
There is an even less flattering interpretation of Berkshire's recent performance: it behaves like an insurer, which it fundamentally is, despite its large investment portfolio. Over the past five years, Berkshire has moved largely in sync with the S&P 500 property-casualty index, slightly underperforming it.
Hope for Change Under Abel
I hope Greg Abel will aim higher. However, based on the experience of the last 15 years, achieving that will require substantial changes. The first and most critical step is to abandon the belief that Berkshire has a meaningful advantage in deploying capital during major market dislocations, as Abel recently suggested. This advantage did not prove significant during the great financial crisis: Berkshire shares only slightly outperformed in the decade following the 2007 market collapse, and its equity value per share growth was historically average during that period. It is even less true today.
