Warren Buffett had a rough 2019, but is Berkshire Hathaway about to turn things around? The greatest investor in history closed the year up by 11%. But that performance trailed the S&P 500’s 30% rise in 2019 by 19%. This marked Buffett’s worst performance relative to the S&P 500 in a decade. In fact, Buffett has underperformed the S&P 500 for 15 years straight.
The combination of Berkshire Hathaway’s size and Buffett’s infamous aversion to new technology stocks (except for Apple!) seems to have caught up with him. But could it be that now is the time to be bullish on Berkshire Hathaway?
The bullish case for Berkshire Hathaway is as following:
1.) Negative sentiment toward Berkshire
With Berkshire lagging the market for 15 years, the sentiment toward BKR is very negative.
2.) Strategies revert to the mean
The more extreme a move in the price, the more extreme the snapback. Look back at the valuation of the Japanese stock market in the 1980s, the dot-com stocks in the 1990s, Chinese stocks in 2007.History teaches that successful but out-of-favor investment strategies often come back.
3.) Berkshire’s $128 billion cash
Berkshire has $128 billion in cash, waiting to be invested. That is a staggering 23% of its current market cap of $555 billion. Berkshire is looking for what Buffett calls an “elephant-sized acquisition” for 4 years. Buffett is waiting for the right investment opportunity to put that cash to work. The cash pile limits the downside and at the same time enables Buffet to pounce on cheap assets following an inevitable downturn in the markets.
If you fear a market crash or a major downturn, Berkshire could be the right place to be.
Sven Franssen