Warren Buffett’s 3 biggest mistakes in 2020
Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), may well be the greatest investor of our generation. Berkshire Hathaway’s annual letter to shareholders for 2019 notes that since 1965, the company’s stock price has risen at a compound annual rate of 20.3%. This compares to a compound annual gain of 10% including dividends paid for the benchmark. S&P 500. This annual difference of 10.3 percentage points may not seem significant, but it allowed Buffett to exceeds the general index by more than 2,700,000% since 1965.
What has been truly amazing is that Buffett doesn’t use secret software or inside information to outperform the market. Rather, it simply locates companies with sustainable competitive advantages and holds them for very long periods of time. This patience is what has allowed the Oracle of Omaha’s net worth to build up over the past several decades.
It also made its fair share of mistakes in 2020, although you might not realize it. Here are three of what I consider his biggest blunders this year.
He sat on the sidelines at a once-in-a-decade massive sale
Without a doubt, the action likely to attract the most criticism in 2020 is Warren Buffett’s lack of activism during the five-week massive sales that took place between February 19 and March 23. During this period, the S&P 500 lost a peak of 34% of its value.
In Buffett’s defense, no one can accurately predict when the market corrections will occur, how long they will last, or how steep the decline will be. Maybe he just believed that the stock market had other downsides to come. But what stands out as a bad decision is the fact that Buffett and his team bought very little during a fall of more than 30% of the shares. For context, the stock market only drops by 30% about once every ten years.
It seems that Buffett is trying to redeem himself for his inaction in recent months by become more aggressive on the purchasing front. Since the start of the third quarter, Berkshire Hathaway has purchased more than $ 2 billion worth of Bank of America Stock; acquired natural gas transport and storage assets from Energy of Domination for $ 9.7 billion, including debt, and spent about $ 6 billion to buy 5% stakes in five of Japan’s top trading companies.
While it’s heartening to see Buffett capitalize on some of his company’s record $ 147 billion, the investor who prides himself on being greedy while others fear, missed a great opportunity to s ‘grab big companies on the cheap in March.
Berkshire slashes Wells Fargo as arguably prime candidate for purchase
Although entirely debatable, it is a puzzle which, after 30 years of detention Wells fargo (NYSE: WFC) stock, Buffett and his team choose 2020, a year when bank stocks like Wells Fargo have been strangled by the coronavirus pandemic, drastically reducing their exposure. Last week, a regulatory filing showed that Buffett’s company sold an additional 100 million shares of Wells Fargo, reducing its stake to 137.6 million shares, compared to 479.4 million shares in March 2017.
If I had to guess, I would say there are two reasons behind this massive sale. First, the pandemic-induced recession will restrict the interest income potential of banks for years to come, and Buffett might just view the investment as dead money. The other possibility is that he lost confidence in management following a branch-level authorized account scandal that went public in 2016-2017.
While I can somewhat understand these reasons for selling, they don’t make much sense to long-term investors. A Wells Fargo share can be owned now for 63% of its book value. In the past 30 years, there has only been a one-week period in March 2009 that the book value of the business has been cheaper.
In addition, Wells Fargo has a history of producing superior returns on assets, compared to other big banks, and it has always had the gift of attracting a wealthy clientele. These affluent customers are less likely to change their spending habits during times of economic downturn, and they will often use multiple financial services.
In other words, selling Wells Fargo now looks like a big mistake.
Buffett hasn’t scaled back his company’s gigantic stake in Apple
Oracle of Omaha’s final 2020 mistake didn’t reduce his company’s position in the tech kingpin Apple (NASDAQ: AAPL), which has grown to represent half of Berkshire Hathaway’s invested assets.
I’m well aware that the previous statement probably sounds a bit crazy. After all, Apple has been a major player since the March 23 background and is a great reason Berkshire Hathaway’s portfolio got rid of the poor performance of the company’s bank stocks. But having half of your assets invested in a company that is valued as a high-growth service stock doesn’t make much sense.
Apple CEO Tim Cook has made it clear that he Apple plans to become a service company, with an additional emphasis on wearables and accessories. The reason? Services are typically subscription based, which tends to generate juicy margins and predictable cash flow with low customer churn. If services were to become the main generator of sales for Apple, the revenue recognition in a sequential quarter would likely be less spotty.
But in the first nine months of fiscal 2020, services account for just 19% of Apple’s sales. Still, the company is valued at 31 times next year’s profits. Even taking into account the expected sales increase with the unveiling of a 5G compatible iPhone, this multiple is far superior to Apple’s historical P / E during the last decade.
If you want to talk about a stock that is a candidate to see its valuation put in place for a while, it’s Apple. Buffett’s reluctance to even modestly reduce Berkshire’s stake in the company could come back to haunt him in the near term.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.