Opinion | Unlike Warren Buffet, the world is missing the forest for the trees, evident in the proliferation of debt
- Berkshire Hathaway sees its investments as groves of trees, still picked for their solid fundamentals. Meanwhile, the world has spent the past decade feeling rich due to a bubble of debt and central bank liquidity, ignoring challenges like climate change
For 54 years, Berkshire Hathaway’s per share market value return has posted a compounded annual gain of 20.5 per cent, more than double that of S&P 500 shares (with dividends included). In 2018, when global markets took a beating and the S&P 500 lost 4.4 per cent, Berkshire returned 2.8 per cent.
The reason for Buffett’s success is that he focuses on fundamental value, looking at good companies with able, no-nonsense management that operate businesses with durable franchises. Eighty-eight-year-old Buffett and his 95-year-old partner Charles Munger do not believe in complicated finance theory, calling financial derivatives “weapons of mass destruction” and saying, “Berkshire’s whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form.”
These investors have an organic ecosystem view of the world, in which they look after five “groves” of economic trees. The first grove comprises non-insurance businesses that Berkshire majority owns or controls. The second grove is a portfolio of publicly listed shares in which Berkshire owns 5 to 10 per cent stakes, of which the most interesting are the sizeable stakes in Coca-Cola and Apple. The third is ownership in partnership with others in four companies, the most prominent being the food giant Kraft Heinz. The fourth is US$132 billion in US Treasuries, fixed-income instruments and cash that keeps the company liquid. The fifth comprises core holdings in insurance companies.
With a market capitalisation of just under US$500 billion, the partnership has outperformed the US economy, and done significantly better than major funds such as the Norway’s Government Pension Fund Global, which yielded 6 per cent rate of return over roughly 20-year horizon.