Warren Buffett, Finance hat Happened To Warren Buffett's Returns
5 percent since 1965.. However, over the last decade, berkshire hathaway has actually slightly lagged behind s p, 500. More importantly, in early 2019, warren buffett actually revealed that he’s had a quote tough time, trying to beat s p 500. So what happened to the oracle of omaha before we get started here? We should address that just because warren buffett has struggled to beat the market doesn’t mean that he’s been doing bad by any means. Over the last 10 years, berkshire hathaway has produced a solid annual return of 11.08. Meanwhile, the s p 500 has returned 11.379 percent without dividends, reinvested and 13.537 percent with the dividends we invested. So, though, warren buffett did lag behind s p 500, he didn’t necessarily perform poorly with that being said, warren buffett’s returns over the past 10 years are only a fraction of what they used to be so let’s. Take a look at some of the driving factors behind this, starting with the size of berkshire hathaway berkshire hathaway is currently the 12th largest company in the world with a market cap of 543 billion dollars, generally company executives and shareholders are ecstatic as their company grows year. After year, but in the case of berkshire hathaway, this has actually turned into a major problem. You see warren buffett has more money than he can effectively invest. As of may 2020, warren buffett was actually sitting on 137 billion dollars worth of cash here’s. The thing warren buffett is a value investor, meaning that he likes to buy companies with strong financials and plenty of growth left.
The problem is that value companies are not as common and generally have lower market caps in the billions of dollars or in the tens of billions for the average person. This wouldn’t be a problem, but when you have 137 billion dollars to deploy, i think it’s clear how this can quickly turn into a major obstacle. Warren buffett has revealed that at this point in time, there’s only a few hundred american companies that are big enough for him to make a reasonable investment in many of which he already owns something that has further made value. Investing difficult for warren buffett is the market sentiment over the past year. As we all know, the pandemic caused a massive sell off in the stock market in spring of 2020.. However, warren buffett didn’t buy the crash, like he did throughout 2008 and 2009.. In fact, he actually sold all of his airline stocks near the bottom of the crash. From a rational perspective, this makes sense, as the airline industry was likely going to take years to fully recover. Most airlines were likely going to end up burning billions of dollars and many were unlikely to even survive the pandemic. Despite this, though, investors have bid up airline stocks anyways take southwest, for example, between 2017 and 2020. Their stock price hovered in the mid 50s during the pandemic southwest stock would drop all the way to 23.87. But since then, their stock price has almost fully recovered standing at 45.
Today, in that perfect world, this would mean that southwest is operating at about 80 of the capacity that they were operating at before the pandemic. In reality, though, in the third quarter of 2020 southwest lost 1.2 billion dollars, indicating that at this point in time, southwest is nowhere close to fully recovering. Unlike the 2008 crash, investing in stocks is much more accessible to the average person, especially with the rise of mobile. Investing apps, consequently, many potential value investments have been bid up before the underlying company has actually started to make a turnaround, making it nearly impossible to find real value investments in the market. Aside from struggling to find places to put his money, warren buffett has also been outperformed by another segment of the market, which is good stocks. Over the past decade, investors have flocked towards companies with enormous future potential, even if they’re overvalued on paper. For instance, one of the most popular growth company investments has of course, been amazon on paper. Amazon hasn’t had the greatest profit margins. To be honest, they’ve had terrible profit margins and aws has really padded their retail deficit throughout the decade, however, amazon has had enormous growth in terms of revenue, market dominance and prime members. As a result, investors have chosen to value amazon based on their future profitability, as opposed to their current profitability. Another popular example of a growth company is no doubt tesla and their promising outlook in terms of the ev and av markets.
Anyways, a lot of the growth in the s p 500 in recent times, has been thanks to these growth stocks, while value stocks have underperformed the broader market. Moving on warren buffett has made some bad investments as well. As we previously discussed. Warren buffet has limited investment opportunities in the market, so he shifted some of his focus towards growing current investments in 2015, berkshire hathaway and 3g capital would decide that it was a good idea to merge together craft and heinz. They were both monster food companies, so combining them should only make them stronger right. Well, though, that works out in theory it didn’t work out so well in practice. Right after the merger was completed, the two companies decided that they should help the other company using their strengths heinz had a global reach, while craft was mostly concentrated within north america, so the two decided to expand craft’s popular sub brands to international markets. Meanwhile, they also spent significant time on trying to pull the resources to cut down on prices and reach more people. However, the focus on international expansion and cutting down costs resulted in them losing sight of major trends within the marketplace, such as a trend towards healthier foods. This loss in focus along with some poor management decisions, has sent craft heinstock tumbling down to the low 30s, which is only a third of where the stock stood just a couple of years ago. Clearly, even the best investors have their fair share of losses.
Despite decades of experience – and that brings me on to the next major shortfall for berkshire hathaway, which is her long investment history, warren buffett has led berkshire hathaway since 1965 and over the many many decades their diversity has slowly but consistently grown. Diversity is great when you’re looking to create a safe investment portfolio, but at the same time, diversity largely hinders the growth rate of the investment portfolio risk and reward are directly tied together when it comes to investments as a result, it’s not a surprise that the reward Has slowly declined as the risk declined now berkshire’s holdings aren’t, quite as diverse as something like the s p 500, but they nonetheless hold quite a bit as of september 2020. Berkshire hathaway has a solid 49 different holdings. They continue to hold significantly more capital in companies where they have greater conviction, such as apple bank of america and coca cola. However, it doesn’t take very much diversification to significantly limit growth rates. Let’S take apple, for instance, berkshire hathaway holds a whopping 137 billion dollars worth of apple stock, which accounts for about half of their portfolio in 2020, apple stock, surged, a massive 70 percent. If one’s entire portfolio was just apple stock, which is not a good idea, then their portfolio would likewise go 70 percent, but what if only 50 of their portfolio was apple stock and the rest were average stocks that match the market and return let’s say 10 in Such a scenario, the portfolio’s overall return over the year, would be 40, which is still a phenomenal return.
However, it’s only a fraction of 70 percent, and this becomes extremely clear over time if both portfolios started with 100 after the first year. The diversified portfolio would only be 30 behind the non diversified portfolio, but if this phenomenon continues for 10 years, the diversified portfolio starts to fall behind significantly at the end of 10 years. The diversified portfolio would stand at 2 892, while the non diversified portfolio would stand at a whopping, 20 thousand. As you can see, though, the diversified portfolio enjoyed return rates that were over half the rate of the diversified portfolio. The diversified portfolio only ends up with less than 15 of the total returns. This is why warren buffett and most of the top billionaires hate diversification. In fact, warren buffett has stated quote: diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing now, this isn’t to say that you shouldn’t diversify. But if you’re looking to beat the market, a concentrated portfolio is essential and though warren buffett is well aware of this principle, he hasn’t been able to do much about it, he’s at a point where he either chooses to diversify, or he leaves the money in cash Which is even worse, thus, as berkshire hathaway has grown, warren buffett has been forced to diversify, which has substantially hurt his gains at the end of the day, if you haven’t noticed yet there’s one overarching theme throughout all of this, which is that with time, berkshire hathaway As more or less become the market itself in the early days when they were small, nimble and concentrated berkshire had to enjoy gains of 30 40 and even 50 per year, but as they have grown in size, they have become too big to effectively invest all of Their money as a result they’ve been forced to diversify their portfolio and settle for smaller gains.
In the end, though, it looks like the glory days of warren buffett are slowly coming to an end. It’S no question that his investing philosophies and legacy will live on for centuries to come. What do you guys think is the main reason for berkshire hathaway’s declining returns comment that down below also drop a like. If you guys thought this video explained the various obstacles. Warren buffett faces well and, of course, consider joining our discord community to suggest future video ideas and consider subscribing to see more questions logically answered.