Shares in Berkshire Hathaway, the company run by Warren Buffett, fell again today, as they have fallen seemingly every day this year, and the stock hit another 52-week low. Berkshire shares–which come in two classes (“really expensive” and “pretty expensive”)–are now off 15 percent for the year and off 30 percent from their all-time high.
The stock’s more recent troubles have apparently sparked a raft of rumors that Buffett is sick and will soon be stepping down from his chairmanship. (The rumors are false.) But Berkshire has had other, more real problems as well. Although the general perception of Berkshire is that it’s essentially a mutual fund, so that in buying Berkshire shares you’re buying Buffett’s stock-picking experience alone, in fact the company has a kind of classic portfolio strategy. It owns, among things, low-cost insurers GEICO, Dairy Queen, and, most prominently, reinsurer General Re. In fact, Berkshire’s acquisition of General Re in 1998 has helped weigh down the stock, since insurance companies almost across the board are hovering near 52-week lows.
Although Berkshire is not a mutual fund, much of its annual performance does depend on how well Buffett’s investment choices pan out (one of the great things about acquiring a company like General Re is that it comes with a huge float of cash from premiums that can be reinvested). And, as is by now well-known, many of Buffett’s most prominent favorites have been limping along for quite some time now. Coke, Gillette, Nike: Not only are these companies’ stocks struggling, but the companies’ underlying businesses are not delivering either the revenue growth or the earnings power that Buffett had been counting on.
There are various ways of reading Berkshire’s recent woes. You might see it as an indictment of Buffett’s buy-and-hold strategy, believing that it limits Buffett’s flexibility and keeps him tied to investments that he’d be better off getting rid of. But if you’re going to try to beat the market by picking stocks, buying and holding is the only logical strategy, both because of taxes (you pay essentially half the taxes on a long-term investment that you do on a short-term one) and because it is, as Peter Lynch was fond of saying, the 10- and 20-baggers (stocks that rise 10 or 20 times) that make up for all the bad investments everyone is bound to make. That doesn’t mean that if you hold stocks for a long time you’re guaranteed any 10-baggers. But if you jump in and out of stocks, you’re guaranteed none.
This is true even in today’s seemingly irrational market. If you bought Qualcomm on Jan. 1 of last year and held it, you saw your investment jump 2,400 percent. If you had tried to trade the stock on a weekly or monthly (let alone daily) basis, your returns would have magnitudes smaller. Buffett’s absolutely right to buy and hold. He just hasn’t been holding the right stocks recently. And, in any case, it’s absolutely possible that a year from now his portfolio will be looking much better.
You might also, as some have suggested, look at what’s happened to Berkshire as evidence that so-called “value investing” is outmoded. But this is ill-conceived. In the first place, the distinction between value stocks and growth stocks is a false one, because the only reason a stock has value is because it’s going to grow in the future at a pace faster than the market is currently anticipating (otherwise the stock would be more expensive). And in any case, Buffett was never averse to paying high prices for stocks that he believed to be valuable. In a sense, after all, every time he didn’t sell his Coke shares or his Disney shares, he was affirming that they were undervalued, even though they were expensive by traditional standards.
What can be said about Buffett’s recent investment strategy–set its performance aside for now–is that it has been almost willfully blind to the importance of “technology,” however broadly defined that is. Buffett has often said that he doesn’t invest in technology stocks because he doesn’t understand them, which is a reasonable thing to say–you should invest in what you know–but also ultimately a frustrating one. At this point, after all, technology is central to the growth of the U.S. economy, and the dominant technology companies are making money–real money–at a rate and with an efficiency unparalleled in this century. By most standard criteria, over the last decade companies like Microsoft, Cisco, and Intel have established enormously powerful franchises, franchises similar, in many respects, to those established by Coke and McDonald’s, and far more powerful than the ones owned by many consumer brands (like, say, Nike or Sara Lee).
Now, it’s fair to ask “Can you invest in Cisco [which, full disclosure, I am invested in] if you don’t know the difference between a router and a switch?” But there are two good answers to that question. The first is that even if you don’t know, there are plenty of people you can ask, and plenty of people who can give you an opinion on whether Cisco’s product line will be superseded any time soon. (Just as you’d want to know whether kids who wore Nikes liked the shoes.) The second is that you can learn the difference between a router and a switch, not well enough to design one yourself, but well enough to sort of understand what John Chambers is talking about when Cisco does a conference call.
In the end, it’s this self-imposed sense of limits, this idea that you just can’t master what you don’t already know, that’s most most perplexing about Buffett’s resolute refusal to invest in technology stocks. If this were 1910, would he still be refusing to invest in any company that dealt with electricity, because it was too hard to understand?