We, the investing public, like to think there are gurus who can lead us safely and surely to profits. We need them and create them. In Behavioural Finance there has been much study of crowds and their need for leaders. The crowd will sometimes justify their choice blindly and be very harsh towards anyone who questions or does not agree with the group’s choice. There is great comfort in believing someone knows best and is there to look after us.
The cult of The Oracle of Omaha fits this profile well. (Oracle= a person (such as a priest or priestess) through whom a god was believed to speak.)
Warren Buffett is known worldwide for his investing skills. His business success has secured him the position of the world’s third wealthiest person. As CEO, chairman, and largest shareholder of Berkshire Hathaway, he has led the company in making clever investments that have catapulted class A shares higher than $200,000. Many individual investors closely watch, study and copy Buffett’s every investing move, hoping share in the success of the guru.
But how did the oracle do in 2015? Where did he lead his followers? 2015 was Buffett’s worst year relative to the rest of the U.S. stock market in six years. By year-end Berkshire Hathaway was down over 11%. He now advises investors to consider Berkshire’s share price over the long term rather than its book value – previously his ”rule” for valuing a company. Three of the biggest holdings in Berkshire’s portfolio, American Express, Wells Fargo, and Wal-Mart contributed a $1.2 billion hit to his portfolio. He also stubbornly weighs his portfolio to the fortunes of the oil and gas industry through its rail road business which generates most of its income from transporting oil and coal. This was the worst year ever to be dependant on the fortunes of the energy sector.
But his worst holding for the year was IBM. The Oracle bought $13 billion in IBM stock since 2011, that’s a 15% hit to its portfolio holding. Buffett initially bought IBM in the first quarter of 2011. He bought more than 4.5 million shares at an average price of $159. This was a shock at the times as he had told us that he did not understand technology stocks and he would not buy anything he did not understand. By the end of 2011, IBM holdings accounted for 18.6% of Berkshire’s portfolio, and Buffett made purchases when the stock was as high as $197. It finished the year at $190.
In his golden anniversary year, celebrating Buffett’s 50 years at the helm of Berkshire Hathaway, the conglomerate is down 11%.
I am not gloating over their misfortune. 2015 was a difficult year for us too. It is only that I feel 2016 might be the year that people cease to be blind to what is actually happening at Berkshire Hathaway. The stocks is a very volatile investment. his story is of stability and solid ponderous investing. but BRKa has lost 50% os its value twice under his command. The first time in the period from 1998 to 200 and then again in 2008 to 2008. Unfortunately it in the period into the 2008 high that most of his fans bought into the company. they had to wait six years to get any profit on their investment. This is a dangerous investment vehicle not the safe one most people perceive it to be. Expect to hear more and more that the old man has lost it. when the crowd turns on its heroes it can be vicious. Think of Paul Volker. I think in 2017 we will call those who blindly followed the oracle and contributed to the Warren Buffett guru industry investment fools. We would all like to have his bank balance though.
Trevor Neil MSTA MCSI