Three Longs & Three Shorts

Has Warren Buffett Lost His Touch?

The preceding two short reads being both on technology is in-line with the rising frequency of technology related articles in 3L-3S and perhaps in-line with the increasing role of technology in our lives in general. Here’s a piece by Nick Maggiulli showing why in this increasingly digital world, Warren Buffett’s self-acknowledged hole in his ‘circle of competence’  – technology, has been the primary reason for Berkshire’s under performance in recent years. Nick in his typical data-intensive style first demonstrates this underperformance:
“..if you had purchased Berkshire stock on December 27, 2002, you would have underperformed the S&P 500 by 2% annually through today… From 1965 to 2002, Berkshire underperformed the S&P 500 in only four of those 38 years (roughly 10% of the time) and outperformed the S&P 500 by double digits in over half of the others (53% of the time). But in the 17 years since then from 2003 to 2019, Berkshire has underperformed the S&P 500 in eight years (47% of the time) and has outperformed by double digits on only four occasions (24% of the time)…. Since the dot-com bubble burst, Berkshire has been four times more likely to underperform and half as likely to outperform (by double digits) the S&P 500. Additionally, Berkshire has lagged the market over basically every time scale for the last 15 years.”
He then goes on to explain the reasons for the underperformance. He suggests that Buffett’s massive outperformance during the dotcom crash gave a false conviction that he was right in staying away from technology. Nick quotes Marc Andreessen: “The dotcom crash hit in 2000, and all these ideas that were viewed as genius in 1998 were viewed as complete lunacy and idiocy in 2000. being the classic example. So, it’s actually really striking. All of those ideas are working today. I cannot think of a single idea that isn’t working today. The kicker for the story is that there is a company, Chewy, that just got bought for $3 billion.”
Effectively “the dot-com bubble wasn’t wrong, it was just early”
“If you agree with Andreessen’s theory, then this suggests that Buffett’s “victory” following the dot-com crash wasn’t a victory at all. He was merely delaying the inevitable. It’s like Buffett’s portfolio got upgraded to first class on the Titanic. Things looked good initially, but, in the long run, it couldn’t be saved.
You might think that this take is too harsh, but consider this: If you compare the investment holdings of Berkshire Hathaway from year-end 2018 to year-end 2019, you will see that roughly half the gain in market value of Berkshire’s investment portfolio came from one company — Apple. This was also in a year where Berkshire returned 11% for shareholders compared to 31.5% for the S&P 500.
So, just imagine how much worse Berkshire would have performed had it not started acquiring its Apple position in 2016:
Berkshire’s stake in Apple represents 21% of its current market capitalization. One-fifth of Buffett’s empire came from one technology investment that was brought into Berkshire’s portfolio only four years ago. The Oracle of Omaha essentially missed the proverbial boat (perhaps yacht is more fitting in this case) on high-growth technology stocks.”