The news earlier this month of Warren Buffett planning to step down from running Berkshire Hathaway (NYSE:BRK.B) caused quite a stir in the investing community. The great man will soon be making way for Greg Abel, someone who’s been in the business for a long period already. He’ll be hoping to continue the strong performance of the stock. But for now, if an investor had put £5k in Berkshire a year back, here’s what they would currently have.
Looking at the figures
A year ago the US stock was trading at $404. It’s now at $501.75, resulting in a 24% return. In terms of cash, it would translate the initial £5k to an unrealised figure of £6,200.
It’s impressive to have achieved a 24% gain in a single year. Yet it’s important not just to benchmark this against our subjective view on the sort of return we’d like. Rather, it’s better to benchmark this against the broader market and other peers. For example, the S&P 500 is up 11.8% over the same time period. This highlights that being an active stock-picker over this time frame could have been better than simply buying a market tracker.
Yet what if the investor had been active but bought a similar stock, like Bill Ackman’s Pershing Square. That stock is down 3.5% in the past year!
Clearly, Berkshire has done very well, managed by both Buffett and his extended management team.
Reasons for the rally
One large factor behind the share price performance has been Berkshire’s stake in Apple. In fact, over this period, it was the largest holding in the portfolio, at over 40%. Aside from the gain here, it should be noted that Berkshire’s core insurance businesses posted improved underwriting profits and investment income due to higher interest rates.
Finally, investors have noted the large cash position ($348bn) that Buffett and his team were building up and ready to deploy with any attractive ideas. I think this drew in some new investors to the company who are expecting him to strike some large deals soon.
Direction from here
Despite Buffett’s incredible investment returns, it’s not guaranteed that next year will deliver another great performance. Some argue that the company is overly reliant on Apple. If that business and its stock start to underperform, it would significantly impact Berkshire’s share price.
Succession risk is also there. Abel is the best contender, but he will still struggle to replace Buffett. With Charlie Munger (Buffett’s right-hand man for many decades) now sadly dead, Abel will have to rely on others for advice. Even though I don’t expect any large strategy shifts in the short term, some investors might not want to buy the stock when Buffett retires. That’s understandable.
Although an investor would have done very well in the past year, I think the outlook for the next year is much cloudier based on the portfolio holdings and the leadership changes ahead. I’d be inclined to consider a wait-and-see approach with this one.
