FOLLOW BUFFETT’S INVESTMENT PRINCIPLES: GREAT INVESTOR TOM RUSSO CONTINUES TO DO SO

June 21, 2019

Berkshire Hathaway stock has underperformed the S&P 500 for the past decade. By a recent calculation, Berkshire’s stock has risen by nearly 260% versus the market’s more than 300% advance in the decade ended in 2018.

Despite Berkshire’s stunning record since 1965, 21% compounded annualized gains, this is not the first time that the company’s shares have underperformed the market for a decade. It’s happened several times in recent years.

Berkshire has outperformed the market by double digits in every trailing ten year period since 1978. But it hasn’t had a double-digit advantage since 2002, and in recent years it has underperformed the market in three ten year spans.

Are Berkshire Hathaway’s best years behind it? Great investor and long-time holder, Tom Russo responds.

WEALTHTRACK Episode #1553; Originally Broadcast on June 21, 2019

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THOMAS RUSSO

  • Managing Partner,
  • Gardner Russo & Gardner
Consuelo MackGlobal central banks are easing around the world and the Federal Reserve is leaning in that direction. At this week’s policy setting committee the Fed kept its benchmark rates unchanged in a 2.25% to 2.5% range, but Fed Chairman Jerome Powell cited “trade developments and concerns about global growth” in stating that “the case for somewhat more accommodative policy has strengthened.”

Other central banks are not waiting. According to Strategas Research Partners, at least 25 banks have cut rates in recent months from Angola and Australia to India, New Zealand, and Ukraine.

Investors reacted to the prospects of a potential rate cut by sending stock prices higher and interest rates lower. The S&P 500 closed at a record high of 2954.18 on Thursday and the 10-year Treasury yield fell to 2% for the first time since 2016.

Berkshire Hathaway stock has badly lagged the S&P 500 so far this year. It’s basically flat vs. the market’s 17% gain. On a total return basis, Berkshire’s stock has trailed for the past decade. Berkshire doesn’t pay a dividend. The S&P 500 does, which makes a difference. Berkshire’s stock has risen by nearly 260% versus the market’s more than 300% total return advance in the decade ended in 2018.

Despite Berkshire’s stunning record since 1965, 21% compounded annualized gains,   this is not the first time that the company’s shares have underperformed the market for a decade. It has happened several times in recent years.

Berkshire has outperformed the market by double digits in every trailing ten year period since 1978, but it hasn’t had a double-digit advantage since 2002, and in recent years it has underperformed the market in three ten-year spans.

Even Warren Buffett himself admitted the company’s glory days of outperformance might be over. In an interview in the Financial Times his response to the question: if Berkshire would be a better investment than the S&P 500 he said “I think the financial result would be very close to the same.” He went on to say “…if you want to join something that may have a tiny expectation of better (performance) than the S&P, I think we may be about the safest.”

At a $507 billion market capitalization and few places to deploy it in enough size to make a discernible difference to the bottom line, is Berkshire just too big?

Over the years Berkshire Hathaway has benefitted from sizable stock buybacks in some of its major holdings. In Berkshire’s 2018 annual report Buffett cited American Express where its holdings “remained unchanged over the past eight years,” but our “ownership increased from 12.6% to 17.9% because of repurchases…”

In the same his 2018 Letter to Shareholders, Buffett said the company itself “will be a significant repurchase of its shares…at prices… below our estimate of intrinsic value.”

What else does Buffett have up his sleeve to enhance shareholder returns?

The company has never purchased a tech stock. It recently bought Amazon and Buffett heaped praise on CEO Jeff Bezos. Berkshire has also never paid a dividend. Could that be next?

This week’s WEALTHTRACK guest is a long-time holder of Berkshire stock, an avid student of Buffett’s style of value investing with no intention of changing his approach.

We’ll be joined by Tom Russo, Managing Partner of investment advisory firm, Gardner Russo & Gardner where he oversees around $11 billion including his Semper Vic Partners fund which he launched in 1984 after hearing Buffett address his class at Stanford.  Semper Vic has generated 14% compound annual returns since inception, handily outperforming the S&P 500’s 11% returns.

The global value manager focuses on owning a small group of exceptionally well-managed brand name firms – 19 at last count – with dominant, almost unassailable positions in their mostly consumer-oriented businesses and then holding them pretty much forever. Berkshire Hathaway has consistently been one of his largest positions. On this week’s show I asked Russo, given Buffett’s modest expectations for the stock’s future performance, if he is rethinking the position.

As usual, this week’s program is available to our PREMIUM subscribers immediately.  In our exclusive EXTRA feature Russo talks about a new hire and how it fits into his history with family-controlled firms.

Don’t forget, if you are traveling, it’s easy to take WEALTHTRACK with you! The WEALTHTRACK podcast is available on TuneIn, Stitcher, and SoundCloud as well as iTunes and Spotify.

Thank you for watching. Have a great weekend, and make the week ahead a profitable and a productive one.

Best regards,

Consuelo Mathews Asia

NEVER RISK GETTING CAUGHT SHORT OF CASH

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No Bookshelf titles this week.

GLOBAL REINVESTMENT PROMISE

Nestle SA ADR (NSRGY) NSRGY Chart

NSRGY data by YCharts

  • Berkshire Hathaway Inc B (BRK.B)
  • Heineken NV ADR (HEINY)
  • Alphabet Inc A (GOOGL)

SEMPER VIC PARTNERS LEADING HOLDINGS

  • Heineken NV (HINKF)
  • Nestle SA ADR (NSRGY)
  • Unilever PLC ADR (UL)
  • Diageo PLC (DGEAF)
  • Pernod Ricard SA (PDRDF)
  • Compagnie Financiere Richemont SA (CFRHF)
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NEW ADDITION

Great Value investor Tom Russo recently added a new Senior Research Analyst to his firm’s team, who happens to be his son Christopher. As is his custom Russo introduced him in a recent letter to investors.


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