COMPARE AND CONTRAST
Berkshire Hathaway held its annual shareholders’ meeting recently and the inevitable flood of articles and stories have appeared covering the meeting and the investment record and activities of Warren Buffett. Let’s look at some of the issues mentioned and how they compare to trends in the general investment community.
While there has been some question about some short-term holding periods of public companies in the Berkshire Hathaway portfolio, the fact remains that the average holding period for the largest ten holdings has been about 20 years. Buffett has described his investment time horizon as “forever.” By contrast, the average holding period for stocks traded on the New York Stock Exchange and the NASDAQ market has declined from five years in the mid 1970s to just 10 months in 2021. Is this frenetic trading activity adding any value? Doubtful!
While Berkshire Hathaway owns about 45 publicly traded stocks, its top ten holdings represent 85% of the portfolio. Although some of the added names are attributable to the two other managers who oversee a portion of Berkshire’s portfolio, it is a fairly concentrated portfolio. The average stock mutual fund today holds well over 100 stocks, often many more. Combined with the ever-shortening holding periods, it’s unlikely that many of those fund managers know a great deal about many of the stocks they own. They see their holdings as blips on the computer screen rather than ownership interests in growing, profitable, financially sound, cash-generating, well managed businesses.
Buffett has been a long time fan of companies buying in their own shares, but he provided a word of caution at the annual meeting: “If the stock price is above the company’s intrinsic value, it’s a no-brainer to NOT do a share repurchase program.” In other words, it does not do shareholders (owners) any good to buy back shares at prices above their estimated business value. Yet, according to the most recent statistics, share buyback announcements are currently running at double the pace of 2022. While there are likely some companies with shares selling below intrinsic value, the overall market is still selling at elevated levels and most companies are overpaying for their own stock. Moreover, companies have for the last several years taken on additonal debt to buy back shares, some to the exteme of eliminating their shareholders’ equity. We don’t see how this will work to shareholders’ benefit in the long-term.
These are just three examples in which a large number of market participants seem to be moving in the opposite direction of one of the most successful investors in history. Berkshire Hathway’s fundamental investment principles are largely common sense: buy a relatively small number of high quality companies with a long-term horizon, but make sure you pay reasonable prices for them. Over time this has proven to be a very profitable strategy.
Our group of widely-held stocks* is currently trading at around 84% of estimated value. Bargains remain scarce so we’ll bide our time until Mr. Market offers us stocks at much lower prices.
Stock market performance was mixed in April, with the small- and mid-cap averages down 1-2%, the large cap indexes up 1½ to 2 ½%, and the NASDAQ Composite essentially flat. Year to date, all indexes are positive except the S&P Small-Cap Index, which is down marginally. The large cap indexes continue to dominate, with the S&P 500 and the NASDAQ up over 8% and 16%, respectively, but other indexes are up only 2-4%. Over the last twelve months, indexes were mixed, with returns varying from up over 3% to down over 5%. Our group* of portfolio stocks have produced positive returns in the last month, year to date, and last twelve months.
*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.
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