Do Long-Term Berkshire References Matter? Stocks Versus Bonds (BRK.B, BRK.B, BAC, GS, GE, HOG, TIF)

Berkshire Hathaway Inc. (NYSE: BRK.B) (NYSE: BRK.B) is very widely followed due to the great performance through time and due to the following of the great Warren Buffett.  It has been an amazing story that won big on the growth of America.  It is interesting that long-term values are used retroactively over and over, when all that really matters now is “what lies ahead”…

An interesting read from one of our friends talks up the consolidated annual growth rate of Berkshire Hathaway going all the way back to 1989.  It shows what the great Warren Buffett hopes you will believe for the future: 14.9% CAGR for Berkshire Hathaway versus 6.8% for the S&P 500 Index. Our question is more about how this will compare in the years ahead. 

Buffett himself has said he already expects that Berkshire Hathaway shares will lag the S&P 500 Index in years when the S&P rises sharply.  This puts Berkshire Hathaway in a slightly defensive bet against the S&P 500.  The company maintains a large cash balance and it is actively invested in bonds.

Another argument we have is that perhaps Berkshire Hathaway should be benchmarked more against a blend of the Barclays Aggregate index and the S&P 500 Index so that it tracks a blended performance of stocks and bonds.  Should it be an equal-weighting between the two indexes?  Probably not.  Maybe it should only be 30% weighted in the bond side.  We’d love to see a blended analysis of this through time.

Consider how many corporate bets Warren Buffett has made on the preferred share investments rather than just the common stock.  Some bets have included warrants so that there is large upside, but arguably these were debt investments which have a priority over the common shareholders if there is ever an implosion.  Some of the bets in this manner were in Bank of America Corporation (NYSE: BAC) most recently, but there have also been big bets of this sort in Goldman Sachs Group Inc. (NYSE: GS) and General Electric Co. (NYSE: GE). 

Buffett even took a $600 million stake in senior unsecured notes in Harley-Davidson Inc. (NYSE: HOG) in 2009 with a 2014 maturity at 15%.  He also took a 10% note offering in Tiffany & Co. (NYSE: TIF) in early 2009 of $250 million with those notes maturing in 2017 and 2019.

Warren Buffett of course is no different from other great managers in the sense that he talks his book.  He has to use all of those corny old analogies to try to keep investors focused on the long-term horizon rather than just a few months out.  Buffett has also recently said he prefers more stable foreign sovereign debt than what the low rates of the United States pays in Treasuries.

Much of this long-term pondering about Buffett’s performance only matters to those who bought back then and held.  All that matters for new investors is what the prospects are for the next ten years.  Our take is that Berkshire Hathaway comparisons to “the market” need to at least have some form of a blended bond portfolio with a smaller weighting than the S&P 500 Index.

JON C. OGG