AFTER THE BELL
Berkshire Hathaway is the Apple of our eye
Warren Buffett, the CEO of renowned investment house Berkshire Hathaway, is well known as the world’s most famous value investor. Funny how sometimes he doesn’t act like it though.
This week, Berkshire Hathaway’s investments made this past quarter were made public through something called a 13F filing with the US Securities and Exchange Commission. The regulations require institutional investors managing more than $100-billion to file the form, which specifies their equity holdings.
It turns out that Berkshire has loaded up on even more Apple shares, bought oil stocks heavily and made an interesting bet on a niche (in US terms) financial services company, Ally Financial. Overall, the company spent $6-billion in the quarter, much less than the $51-billion it spent in the first quarter, but it is still spending through the downturn, which is good news.
This is all a big turnaround from the same time last year, when Hathaway CEO Warren Buffett lamented the small number of good buying opportunities. Consequently, as companies often do when they have lots of cash and nowhere to go, Berkshire decided that the most attractive investment out there was themselves. So they bought chunks of their own shares. Well, you know, as they say, how can others love you if you can’t love yourself?
In some ways, Berkshire is now taking advantage of the market dip. It’s surely no accident that oil stocks have been the best performers over the past year. But you suspect the company is also applying its philosophy: invest, first and foremost, in value; or to put it another way, shares that are undervalued on financial or comparative metrics.
Value investors will often command their clients, as if reciting the gospel, that they shouldn’t try to time the market. In other words, they should not invest based on a perceived low point or disinvest at a perceived high point. Down that road lies perdition.
But there is a tautology here because shares often start lighting up the radar of value investors when the market dips. So, often value investing coincides with movements in the market, even though proponents of value investing don’t like to acknowledge it.
The reason I’m going on about this is that the past decade has thrown up an interesting anomaly. Normally, investors, professional and otherwise, describe themselves, or perhaps are described by others, as either value investors or growth investors.
The difference is slightly opaque, but generally the idea is that there are really only two ways to make money consistently on the stock market: invest in growth stocks — think tech gurus, typically young, propounding the newest, grooviest latest thing. (I suspect they don’t actually use the word “groovy”). Or value investing: think old, experienced, seen it all, affable chaps at the club.
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As someone now slightly long in the tooth, it pains me to say that over the past decade, the tech gurus, with their irritating habit of speaking way too fast and massively over your head, have been winning absolutely hands down. I mean they are just smashing it.
Investment house Morgan Stanley produces an ongoing graph that takes a huge chunk of the large- and medium-sized companies over the entire planet and splits them into growth and value stocks. The comparative outperformance of growth stocks over the past decade has been just phenomenal. On a consistent basis, value stocks are now 70% cheaper than growth stocks. That is way, way into record territory.
This is not how things are supposed to be. It’s not how they have been. Over the past century, value stocks have consistently outperformed growth stocks. But the past decade has been different.
What is this telling us? I think it tells us three things: First, we truly do live in an era of technological magic. Science fiction writer Arthur C Clarke famously wrote that any sufficiently advanced technology is indistinguishable from magic. And that is us now. It’s not an accident that Berkshire’s biggest investment by miles is in Apple.
Second, for all the misery in the world, of which there is plenty, at the base of it all, economic wellbeing is improving almost everywhere now, except for some isolated pockets which we know almost too much about. As NYU professor and well-known podcaster Scott Galloway recently pointed out, in 1980, more than 40% of humanity lived in extreme poverty. Today, less than 10% do. In 1980, 44% of humanity had no democratic rights. Today, it is less than 25%. In 1980, 30% of people 15 years and older had no formal education. By 2015, that percentage had been cut in half.
That economic wellbeing is providing ballast to big- and medium-sized corporations everywhere, and it has also provided jet fuel to growth stocks.
And third, a long period of globally low interest rates has provided growth stocks with enormous amounts of cheap capital with which to experiment. And yowzer, experiment they have.
This last point is of course on the brink of changing, which is why this is such a poignant moment. Will value stocks have their moment in the sun? History tells you they will. Instinct tells you, perhaps not yet. Buffett says (effectively): let’s compromise, buy Apple shares. DM/BM