Warren Buffett’s Berkshire Hathaway underperformed the S&P 500 by a wide margin last year. Notably, 2019 was the company’s worst underperformance compared to the market since 2009. The underperformance seems to be an end of Buffett’s dilemma in the past decade.
Buffett is among the most famous value investors of all time. Under his stewardship, Berkshire Hathaway (BRK.B) (BRK.A) has outperformed the S&P by a wide margin in aggregate over the last five decades. However, the company’s returns in this bull market, which started in 2009, leave little to talk about. In particular, 2019 turned out to be a rough year for Berkshire Hathaway investors. The stock’s returns trailed the S&P 500 by a big margin.
Berkshire Hathaway’s returns trailed the S&P 500
Berkshire Hathaway Class B shares gained 11% last year, while the S&P 500 surged 29%. The underperformance would look even wider if we add the S&P 500’s roughly 2.0% dividend yield. Overall, 2019 was the 18th year since 1965 that Berkshire Hathaway has underperformed the S&P 500. The year was Buffett’s sixth-worst performance compared to the S&P 500. In 2019, Berkshire Hathaway’s performance compared to the S&P 500 was the worst since 2009. In 2009, Berkshire Hathaway gained 3%, while the S&P 500 returned 23.8% with dividends included.
S&P 500 made new records in 2019
Incidentally, stock markets made a sharp rebound in 2009 after the 2008 sell-off. We had something similar last year. After the market crash in the fourth quarter of 2018, US stock markets were strong in 2019. Most economists expected a market crash this year. However, the S&P 500 (SPY) and the Dow Jones Index (DIA) eventually rose to record highs. Overall, 2019 will be remembered for the stock market crash that never came. Last month, Stanley Druckenmiller admitted that he missed out on the rally due to conservatism. Buffett has also been conservative with Berkshire Hathaway’s cash.
Warren Buffett’s $128 billion cash question
Berkshire Hathaway held a record $128 billion cash at the end of the third quarter. Now, there are several things Buffett could have done with the cash like buybacks, deploying cash in publicly-traded securities, or an outright acquisition. In his annual letter, Buffett talked about an “elephant-sized acquisition.” However, in the same breath, he said, “Prices are sky-high for businesses possessing decent long-term prospects.” Last year, Buffett was outbid by Apollo Global Management while trying to buy Tech Data. Will Buffett get his elephant this year? Read Will Warren Buffett Find His Elephant in 2020? to learn more.
Buffett wasn’t able to obtain a big acquisition and Berkshire Hathaway’s activity in publicly-traded securities was also low. As a result, the company’s cash pile continued to swell last year. While corporate America has splurged money on buybacks, Buffett was conservative with share repurchases as well.
Berkshire Hathaway’s buybacks
While some hedge fund managers turned bullish on Berkshire Hathaway last year, Buffett played it safe when it comes to repurchases. While he ironically talked about a hypothetical $100 billion buyback last year, Berkshire Hathaway didn’t spend much on buybacks. Read Should Warren Buffett Walk the Talk on Buybacks? to learn more.
Buffett was conservative with cash last year. While some might see it as a warning from the legendary investor, it added to Berkshire Hathaway’s underperformance in 2019 compared to the S&P 500. A fund, with such a massive cash holding in a year when the markets almost delivered 30% returns, isn’t really expected to outperform.
Not so fun fact for Buffett fans
For the last three decades, Buffett has underperformed the S&P 500 by a wide margin in the last year of each decade. In 1999 and 2009, Berkshire Hathaway’s returns trailed the S&P 500 by a massive 40.9% and 23.8%, respectively. In 2019, Berkshire Hathaway’s returns trailed the S&P 500 by around 20% after accounting for dividends. While this could be a fun fact to analyze, it isn’t really a fun fact for Berkshire Hathaway investors. Call it the law of averages or anything, Berkshire Hathaway had some of its most remarkable outperformance in the last year of the previous three decades. The company outperformed the S&P 500 by 52.9%, 84.3%, and 27.8%, respectively, in 1989, 1979, and 1969.
Last year, Buffett talked about his nightmare scenario. Looking at Berkshire Hathaway’s modest buybacks and tepid activity in publicly-traded shares, 2019 could have been a nightmarish year for the legendary value investor. Read Is Warren Buffett’s Nightmare Scenario Coming True? to learn more.