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Brokerage Weighs In on Why Value Investors Have Underperformed

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Value investors

When we think of value investing, the first name that likely comes to mind is Warren Buffett. As Berkshire Hathaway’s (BRK-B) chair, Buffett has practiced and professed value investing for more than five decades now. Buffett’s performance versus the S&P 500 (SPY) is incredible if we look at their aggregate performances over the last five decades. However, the legendary investor has been underperforming the S&P 500 by a wide margin this year.

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Warren Buffett

But 2019 is no aberration year for Berkshire. The stock’s returns have been largely in line with the S&P 500’s returns for the last decade. In fact, since the start of this century, Berkshire’s returns versus the S&P 500’s leave little to discuss. Now, Bernstein’s head of European quantitative strategy, Inigo Fraser-Jenkins, has weighed in on why value investing hasn’t performed that well. Fraser-Jenkins has put the blame on lower interest rates and technology. He blames lower interest rates for lifting valuations, making value stocks unattractive. Secondly, Fraser-Jenkins believes that “technology has disrupted industries in a way that may permanently destroy ‘moats’ that used to exist around certain industries.”

Underperformance

Even Warren Buffett now expects only a slight outperformance versus the S&P 500. Berkshire has been sitting on a massive amount of cash, which also seems to be driving its underperformance amid the steady rise in the markets. Buffett could also be criticized for errors of omission, as he’s stayed away from tech names such as Amazon (AMZN) and Alphabet (GOOG). However, he did take a stake in Apple (AAPL) in 2016, and Berkshire is now Apple’s second-largest shareholder. Although another of the fund’s managers has taken on a stake in Amazon in the second quarter, the value is too low to move the needle for Berkshire. Read Which ‘Grove’ Is Driving Berkshire Hathaway’s Underperformance? for more analysis.

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