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Berkshire and Buffett: Pressure Due to KHC, Performance


Oct. 15 2019, Updated 12:10 p.m. ET

  • Berkshire Hathaway’s returns have lagged the S&P 500 by a wide margin this year. Chairman Warren Buffett has been criticized in some quarters for not deploying the massive cash pile.
  • However, not everyone is bearish on Berkshire Hathaway. Earlier this year, Bill Ackman of Pershing Square Holdings revealed a new stake in Berkshire Hathaway. He said that the company is misunderstood and undervalued.
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Berkshire Hathaway and Warren Buffett

Berkshire Hathaway’s (BRK-B) (BRK.B) returns have lagged the S&P 500 (SPY) this year. Notably, Berkshire Hathaway’s underperformance hasn’t been small. The company’s Class B stock has gained 1.8% year-to-date compared to the S&P 500’s 18.3% rise. The company has underperformed in other years as well. According to CNBC, the stock’s returns have trailed the S&P 500 in the bull market that started in March 2009. Since Berkshire Hathaway’s returns have been dismal, several observers criticized Buffett for the performance. He has been criticized for Berkshire Hathaway’s massive cash holdings. The cash holdings totaled $122 billion at the end of the second quarter. Buffett has also faced criticism amid the fall in Kraft Heinz’s stock price.

What now?

Previously, Jim Cramer sounded critical of Buffett due to companies like Kraft Heinz and Coca-Cola. David Rolfe, the chief investment officer at Wedgewood Partners, exited Berkshire Hathaway. He criticized Buffett for Berkshire Hathaway’s underperformance. Based on Rolfe’s letter to clients, CNBC reported that he’s frustrated with the company’s big cash pile, missed opportunities, and some seemingly bad investments. Rolfe also criticized Buffett’s investments in Kraft Heinz (KHC) and IBM (IBM). While Berkshire Hathaway exited IBM a long time ago, it’s Kraft Heinz’s biggest shareholder. Rolfe said that some actions “do not inspire confidence that Buffett & Co. are still at the top of their game.” Incidentally, Buffett admitted to making a “mistake” in Kraft Heinz.

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Warren Buffett’s performance

The above chart shows the company’s performance versus the S&P 500. As you can see, Buffett’s outperformance compared to the markets has narrowed down this century. However, due to the splendid returns in the last century, the returns still look great in aggregate over the last 50 years. As Buffett mentions often, that’s the power of compounding. There are several factors that seem to be hurting Buffett’s performance including an aversion to technology stocks.

The fact that Berkshire Hathaway is sitting on a massive cash pile in a rising market isn’t helping the short-term performance either. However, a market crash or recession could help Buffett deploy the massive cash holdings. On that note, he played it safe during the sell-off in the fourth quarter. Buffett didn’t add more Apple shares (AAPL) in the fourth quarter despite a 30% fall in its stock price. Incidentally, Apple stock has risen handsomely this year.

Bill Ackman on Berkshire Hathaway

Notably, not everyone has given up on Buffett. Earlier this year, Pershing Square Holdings’ Bill Ackman revealed a new stake in Berkshire Hathaway. Ackman stressed the company’s underperformance and called it one of the “least followed and misunderstood mega-cap companies.” Berkshire Hathaway is a mega-cap conglomerate with interests ranging from candy to railways. In Buffett’s 2018 shareholder letter, he divided the company into five “groves.” Read Which ‘Grove’ is Driving Berkshire Hathaway’s Underperformance to learn more.


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