May 8, 2017

Respect your elders

by Breakingviews.

Warren Buffett respects his elders. During Berkshire Hathaway’s annual shareholder bash in Omaha on Saturday, the 86-year-old Oracle sang the praises of – and delivered early 88th birthday wishes to – Jack Bogle, the Vanguard founder who pioneered low-fee index mutual funds. While the sentiment is undoubtedly genuine, it is also starting to sound a bit self-serving.

Buffett told the 40,000-strong live audience that Bogle had done “more for the American investor than any man in the country” by saving them tens of billions of dollars in unnecessary charges from portfolio managers. For a long while, though, Buffett offered an even better and equally cheap alternative to simply tracking the biggest stocks.

Back in 1990, for example, the annual total return on Berkshire Hathaway common shares for the previous decade was 32 percent, or an astounding 18 percentage points higher than the S&P 500 Index. By 2016, the annual gap had shrunk to just 1.3 percentage points, according to a recent Breakingviews analysis.

In the latest quarter Berkshire, the company Buffett has run for some half a century, lost money in part because of the cornerstone business of insurance underwriting. At the same time, some of its biggest holdings are in companies that have longer-term question marks that could make it harder for the $400 billion conglomerate to outperform the broader index consistently.

Wells Fargo, for one, is still working through its disastrous fake-accounts scandal. Investors just lodged a large protest vote against the board and Buffett on Saturday criticized the bank for how the affair was handled. He also revealed right before his gathering that he had dumped a third of his stake in IBM, whose value has fallen by about a fifth since Buffett first invested in 2011.

Kraft Heinz, the U.S. food juggernaut in which Berkshire is a big owner, said last week that sales declined amid changing consumer habits. And even as Buffett swigged Coca-Cola on stage, the company’s sales have been falling with concerns growing about sugary drinks.

Meanwhile, Buffett concedes that he “blew it” by not investing in Google and was “too dumb” to realize what Jeff Bezos was building at Amazon. Sitting out the new breed of American icons has been costly. As his returns converge with the S&P 500 Index, Berkshire begins to look like another low-cost steady choice compared to otherwise woeful actively managed funds. Even Bogle might approve.


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