Is this what's holding Berkshire Hathaway stock back?

Investors aren't all happy about the Buffett-led company's performance, but there might be another force at work.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett has been at the helm of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) for decades, and his track record there makes him one of the most successful investors in history. His long-term performance is nearly unmatched, and those who've stuck by the Oracle of Omaha over the years have gotten big rewards for their loyalty.

Yet recently, Berkshire has underperformed the broader market by a significant margin. In 2019 alone, Berkshire stock is up just 1%, compared to a nearly 17% rise in the S&P 500 index. Although there are undoubtedly many different factors at work to explain Berkshire's underperformance, there's also a key factor that many investors don't even realize is happening that could have a dampening effect on the stock's upward price moves.

Berkshire, Buffett, Bill Gates, and big gifts (and sales)

It's been 13 years since Warren Buffett announced that he would give away the lion's share of his fortune gradually over the course of the rest of his lifetime. The Berkshire CEO started out with an initial gift of Berkshire stock worth $1.5 billion, and from there, annual gifts came at regular intervals. For instance, earlier this year, Buffett gave away roughly 16.8 million Class B shares of Berkshire, worth roughly $3.6 billion at the time. The bulk of those shares -- about 12.8 million -- went to the Bill and Melinda Gates Foundation.

Meanwhile, for the Gates Foundation, having huge holdings of Berkshire stock has been an excellent source of funds. Rather than selling off in one fell swoop the large blocks of stock that it receives as donations, the Gates Foundation has instead made regular sales of shares. For instance, in the first quarter, Gates Foundation holdings of Berkshire B shares dropped by 5 million. Another 5 million B shares got sold during the second quarter.

Downward pressure on the stock?

The pace of the Gates Foundation's sales isn't so large that it would have an immediate and obvious impact. Average daily volume for Berkshire amounts to roughly 4 million Class B shares. If you assume equally spaced sales happening constantly during the quarter, 5 million Gates Foundation-held Berkshire shares would equate roughly 80,000 to 85,000 shares per trading session. That's just 2% or so of typical volume.

Neither does it appear that Berkshire's particular niche has done poorly this year. Financial stocks broadly are up almost as much as the S&P 500, and many prominent insurance companies have actually beaten the market, let alone Berkshire's returns.

The likely answer

Yet longtime investors in Berkshire have seen this story play out before. From time to time, Buffett's philosophy simply doesn't lead to favorable short-term results. Shareholders have to endure a period of underperformance -- sometimes extreme -- that calls into question Berkshire's entire way of investing. Eventually, though, fundamentals reassert themselves and Berkshire's stock catches up to its peers.

For me, that first round was in the late 1990s. Buffett refused to invest in go-go internet stocks, and his returns suffered. When the tech bust of 2000 to 2002 hit, Berkshire's businesses were rock-solid, and the stock clawed back the ground it had lost during the 1990s bull market.

The same thing happened to a more limited extent on several other occasions. From 2003 to 2005, Berkshire dramatically underperformed, but better performance in 2006 through 2008 helped to offset its earlier lagging returns. Berkshire has also seen isolated poor years, such as 2015, but they've often gotten followed by big gains like the stock enjoyed in 2016.

Don't miss the big picture

It's always frustrating when a stock you own doesn't do as well as the market -- especially a stock that's as well-known as Berkshire Hathaway. But if you give up hope just because of a year or two in which a stock trails broader stock indexes, you'll often miss out on the gains that result when Berkshire's mode of investing comes back into style.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

If you invested $10,000 in Nvidia stock the day ChatGPT came out, this is how much you'd have today

Buying Nvidia when the disruptive AI chatbot launched would have been a smart move.

Read more »

A Tesla car driving along a road at sunset
International Stock News

Why Tesla stock was climbing today

Investors were encouraged by news of a price hike on the Model Y.

Read more »

Plate with coloured wedges being parcelled out like a slice of pie representing a share split
International Stock News

Stock-split watch: Is Nvidia next?

Nvidia last split its stock when it traded for a pre-split $744 in 2021.

Read more »

A woman in jeans and a casual jumper leans on her car and looks seriously at her mobile phone while her vehicle is charged at an electic vehicle recharging station.
International Stock News

1 Wall Street analyst thinks Tesla stock is going to $125. Is it a sell?

Tesla is no longer a magnificent stock, according to a Wells Fargo analyst.

Read more »

A young man goes over his finances and investment portfolio at home.
International Stock News

Is Nvidia stock a buy?

The company's stock could rise 40% over the next two years and outperform the S&P 500.

Read more »

Man with hands in the middle of two items with money bags on them.
International Stock News

Is Nvidia headed for a stock split?

Nvidia stock has split five previous times in the company's history.

Read more »

Digital rocket on a laptop.
International Stock News

Nvidia shares surged (again) today. Is it too late to buy the red-hot artificial intelligence (AI) growth stock?

Nvidia stock has gained nearly 300% over the past year. Can investors still profit from this AI stock?

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Can you buy Nvidia shares on the ASX?

This stock has rocketed higher. How do we get access to it?

Read more »