Has Warren Buffett Lost His 'Magic Touch,' or Has Something Changed in Markets?

Berkshire Hathaway SPX (with dividends) has delivered over the period.

If ever someone had any doubt about why compound interest has been termed the “eighth wonder of the world," the cumulative returns of Berkshire Hathaway stock should clear up any confusion. The stock has gained 4,384,748% from 1965 through 2023, as compared to the S&P 500’s 31,223% gain. That’s what investing in quality stocks for the long term – something that Buffett has practiced and preached over the years – can do for your wealth.

Berkshire Stock Has Underperformed in 3 of the Last 6 Years

While Buffett has an enviable track record relative to the markets over the long term, his recent performance hasn’t been as great – or, to put it more bluntly, underwhelming. Berkshire stock has underperformed the S&P 500 index in three of the last six years, including massive double-digit underperformances in 2019 and 2020.

Of these last six years - barring 2021, when the stock’s returns were slightly ahead of the benchmark - the only times Berkshire stock has outperformed is when the markets were in the red. A case in point is 2022, as Berkshire Hathaway stock gained 4%, while the S&P 500 Index tanked 18.1%, even with dividends included.

What does Buffett’s recent underperformance tell us; has the investing legend lost his touch, or has something fundamentally changed in markets? We’ll discuss in this article.

Why is Warren Buffett Underperforming the Markets?

Here are some of the reasons Buffett’s performance has trailed broader markets – some of which he himself has acknowledged:

1) Size is no longer Buffett’s friend

Berkshire Hathaway is now an almost $900 billion market cap company, while its portfolio of publicly traded companies is valued at over $370 billion. With such a massive size, it becomes tough to outperform the market, at least to the extent that Buffett once used to do. Buffett has also emphasized that investors should expect Berkshire stock to only slightly outperform the S&P 500.

2) Value investing has underperformed

Buffett is among the best value investors of all time. However, value stocks have been underperforming their growth peers, for the most part, over the last two decades. Berkshire has limited exposure to growth and tech stocks - and if we leave aside Apple AAPL, which Buffett sees as more of a consumer company than a tech company, its tech investments are at best a passing mention in the overall portfolio. 

3) Deals are hard to come by for Berkshire

Buffett has built his reputation as a dealmaker and a lender of last resort. The investing great bailed out companies like Goldman Sachs GS during the 2008 financial crisis, and ended up making good money on those investments.

However, Buffett did not get to play the same role during the COVID-19 crisis, as the U.S. government took up the baton with its massive stimulus package. On a related note, Berkshire faces tough competition from cash-rich funds, making deals harder for Buffett - who has been unsuccessfully scouting the markets for his next “elephant-sized acquisition.”

4) Buffett Has Sat on Cash During Market Rallies

Berkshire Hathaway is now almost like a mutual fund. The company’s cash pile soared to a record high of $189 billion at the end of March, and Buffett has forewarned that the company's cash pile might surpass $200 billion by the end of the current quarter. 

It's safe to say that any mutual fund that sits on such a massive cash pile would underperform in rising markets, while outperforming when markets fall – and that’s precisely what has been happening with Berkshire stock over the last few years.

Why Is Warren Buffett Not Investing? Blame It on the Buffett Indicator 

Berkshire was a net seller (i.e., more stock sells than buys) to the tune of $17.3 billion in Q1. In fact, the conglomerate now has been a net seller of stocks for six straight quarters. Buffett is also not as aggressive with share repurchases as he was between 2020 and 2021, when he cumulatively repurchased over $50 billion worth of shares.

To be sure, the broader market valuations now are higher than historical averages. The Buffett indicator, which is simply the total market cap divided by GDP, is also quite elevated at 188%. For context, Buffett sees a reading of 100% as a sign of fair market valuation.

The current market valuations are not at levels that are screaming buys for value investors. But then, that has largely been the case over the last few years. True to his value investing credentials, Buffett is yet again preferring to sit it out in cash until he finds something that fits into his investing framework.

While it would be futile to predict whether (or when) value investing will make a comeback, or if market valuations – especially the Buffett indicator - might fall to levels that the “Oracle of Omaha” is comfortable with, we can be sure that the nonagenarian won’t compromise on his investing principles, even if it means short-term underperformance.

On the date of publication, Mohit Oberoi had a position in: BRK.B , AAPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.