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Will 2020 Get Better for Warren Buffett and Berkshire Hathaway?

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Sep. 4 2020, Updated 6:54 a.m. ET

  • Warren Buffett, Berkshire Hathaway’s chairman, trailed the S&P 500 by a wide margin last year. So far, 2020 isn’t any better. Buffett hasn’t had a strong performance despite the US stock market crash.
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Berkshire Hathaway versus the S&P 500

Berkshire Hathaway Class B shares (NYSE:BRK.B) have fallen 16.7% this year. The S&P 500 has lost 13.8% during this period. The company’s underperformance compared to the index might look perplexing. Notably, Berkshire Hathaway has a huge amount of cash. Given Warren Buffett’s bias towards value stocks, you would expect Berkshire Hathaway to outperform the index. Last year, Berkshire Hathaway had its worst underperformance in a decade. Warren Buffett’s 2019 underperformance could be attributed to Berkshire Hathaway’s massive cash pile. Despite US stock markets crashing this year, Berkshire Hathaway has struggled to beat the market.

What’s driving Warren Buffett’s underperformance?

Berkshire Hathaway’s portfolio is overweight in the banking sector. Banks have been hit the worst amid the COVID-19 pandemic. Defaults will likely rise as consumers don’t pay their bills. The situation is worse for banks than what analysts expected. Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) missed their first-quarter earnings estimates. However, banks aren’t the only trouble for Warren Buffett. Berkshire Hathaway also has railroads in its portfolio. Railroads have been impacted negatively since large parts of the economy are shut.

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Berkshire Hathaway and Boeing

Berkshire Hathaway also has high exposure to the aerospace sector, which has been impacted by the pandemic. In 2016, Warren Buffett completed the acquisition of Precision Castparts, which supplies parts to aircraft companies like Boeing (NYSE:BA). The pandemic has amplified Boeing’s troubles. So far, the company has seen large scale cancellations. Boeing’s troubles are bad news for Precision Castparts and Berkshire Hathaway. Warren Buffett invested $10 billion in Occidental Petroleum last year through preferred shares. Amid the cash crunch, Occidental Petroleum is paying the dividend in the form of shares.

Not all gloom and doom for Warren Buffett

However, the situation isn’t all gloom and doom for Warren Buffett. Geico, Berkshire Hathaway’s insurance subsidiary, will likely benefit due to lower claims during the pandemic. However, Geico has offered a 15% credit to customers. The company has temporarily suspended policy cancellations due to the non-payment of premiums and policy expiration. Meanwhile, Apple (NASDAQ:AAPL) has been a shining star for Warren Buffett this year. The shares have only fallen by 2.9% in 2020. So far, Apple has been outperforming the markets.

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