Buffett Rules Out ‘Eye-Popping’ Returns. But Investors Aren’t Listening.
Warren Buffett recently warned that Berkshire Hathaway has “no possibility of eye-popping performance.” That hasn’t cooled the ardor of his fans, who could make Berkshire the only non-tech company in the U.S. worth $1 trillion.
Shares of the sprawling conglomerate-—which operates businesses from insurer Geico to BNSF Railway and owns big chunks of Apple and American Express—have roared ahead of the broader market this year, even as Buffett, 93 years old, adapts to running Berkshire without the counsel of his longtime friend and partner Charlie Munger, who died in November at 99.
Buffett will take the stage Saturday at Berkshire’s annual meeting in Omaha, Neb., where thousands of shareholders and onlookers listen eagerly each year as he holds forth on investing, business and life. The weekend gathering, which Buffett has dubbed “Woodstock for Capitalists,” features an exhibit hall with displays from Berkshire companies like Dairy Queen, Fruit of the Loom and Duracell. Shareholders can sip a cocktail Friday evening at the Borsheims jewelry store and lace up their running shoes—maybe from Berkshire’s Brooks—on Sunday for the “Invest in Yourself” 5K.
Many shareholders will arrive in Omaha feeling good. Berkshire has outpaced some of America’s tech titans in 2024, leaving shares of Apple, Microsoft and Tesla in the dust. Its Class B shares have jumped 12%, versus the S&P 500’s 5.2% advance. One Class A share can be converted into 1,500 Class B shares, so A shares trade at a much higher price—more than $600,000, compared with about $400 for a B share.
As Buffett, the world’s most famous stock investor, enters this next stage at Berkshire’s helm, his company is benefiting from an unusual confluence of economic developments that are weighing on the broad stock market.
Stubborn inflation and a resilient economy mean hopes are fading that the Federal Reserve is on the cusp of cutting interest rates. Rate cuts typically boost stocks. Now, portfolio managers and mom-and-pop investors are confronting a world where rates may stay higher than they had imagined, changing the way they are thinking about their investments.
Higher rates mean Berkshire is like a happy saver whose money-market funds are suddenly paying up. Berkshire’s towering cash pile also leaves it positioned to make acquisitions if high rates pressure owners of other businesses to the point at which they consider selling. And as a changing forecast for rates makes investors second-guess their appetites for risk, Berkshire’s reputation as a stock-market safe haven is getting attention.
“In many ways I think Berkshire uniquely benefits from higher interest rates and higher for longer, which is a unique characteristic compared to a lot of the investible universe,” said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments, who holds Berkshire shares in a fund he manages.
The group of big technology stocks that all went up together in 2023—known as the Magnificent Seven—has broken apart. One in the group, Nvidia, has continued to surge, rising 68% this year. But others have run out of steam, with Tesla sliding as demand for electric vehicles cools and Apple suffering as iPhone sales fall in China.
Investors will get their next chance to hear from Buffett, Berkshire’s chairman and chief executive, during a lengthy question-and-answer session on Saturday. Shareholders typically pepper Buffett-—and until this year, Munger—with queries about Berkshire operating companies, the markets and the economy.
Buffett sounded a cautionary note about the road ahead in his February letter to shareholders.
It’s a point he has made before: that Berkshire’s size—it ended 2023 with more than $560 billion of shareholders equity on its balance sheet—will limit its future growth. Back in 1984, Buffett warned Berkshire was big enough that its growth would have to slow. In 1990, he put it this way: “A high growth rate eventually forges its own anchor.” The company kept expanding and its shares kept rising, though their performance relative to the market in recent years depends on when shareholders bought and sold.
In February, he wrote that the handful of U.S. companies “capable of truly moving the needle at Berkshire” have been picked over, and there are basically no “meaningful options” to deploy capital overseas.
Still, plenty of investors have looked at Berkshire lately and liked what they saw.
Shareholders tout the company’s many revenue streams, which flow from businesses in utilities, highway travel centers, aerospace components, children’s clothing and many other corners of the economy.
They talk about safety and opportunity in Berkshire’s mountainous cash pile, which sat at a record $167.6 billion, including cash equivalents, at the end of 2023. And many say they are comfortable with the succession plan for Greg Abel, who runs the company’s non-insurance operations, to follow Buffett as chief executive.
“I would commit 100% of my liquid assets in Berkshire and I wouldn’t think twice about it,” said Paul Lountzis, president of Lountzis Asset Management. “And that’s really unusual for me, because I don’t trust anyone and I’m enormously risk averse.”
Lountzis, who started reading about Buffett when he was 13, said Berkshire is by far his firm’s largest stockholding. He sees it as the perfect fit for the kind of client he wants: ones who are looking to grow their money but do so without lots of risk.
“I will give up gains to preserve capital,” he said.
A hot streak
When Buffett’s annual letter landed, with its prediction that Berkshire would do modestly better than the average company, its stock was on a hot streak.
Both Class A and Class B shares had just notched seven consecutive record closes, their longest such runs in more than six years, according to Dow Jones Market Data. They closed at their current records on March 28, when A shares reached $634,440 and B shares $420.52.
Berkshire ended that day with a market value of more than $909 billion. That figure has ticked down to about $862 billion, keeping Berkshire in its spot as the seventh-largest U.S. company by market value. The bigger ones are all tech giants: Microsoft, Apple, Nvidia, Google parent Alphabet, Amazon.com and Facebook parent Meta Platforms.
The stock’s march higher may excite shareholders, but it has some observers thinking now might not be the best time to buy.
James Shanahan, a senior equity research analyst at Edward Jones, downgraded Berkshire in late September to a “hold” rating from a “buy.” Shanahan still expected solid earnings from Berkshire’s operating companies but thought its share price, then around $357 for Class B shares, reflected that.
“We were probably a little bit early,” Shanahan said recently. “But I feel like investor outcomes are going to be a lot more favorable when they can buy the stock cheaper than where it’s trading right now.”
Berkshire’s B shares traded this week at 1.54 times their average book value, a measure of net worth, over the past four quarters, according to FactSet. That’s a higher valuation than the 10-year average of 1.41 times.
The stock’s climb might have to do with expectations that rates will stay high for longer because higher rates mean Berkshire is finally earning a healthy return on its cash hoard.
The idea of persistent higher rates has forced investors to quickly rethink their expectations for what different assets are really worth, causing unease in markets. Some investors are directing their money into companies that hold up well when volatility strikes, observers said.
“Berkshire’s always been seen as the safe place to go,” said Greggory Warren, a stock strategist at Morningstar.
Safety in numbers
Not only is Berkshire’s huge stash of cash valuable for earning interest income, but the growth of its cash levels over six consecutive quarters through the end of 2023 reassures investors who are looking to park their money safely.
Berkshire would be ready to pay any big losses that arise from its insurance business. The cash also fortifies Berkshire’s financial position in case of turmoil in markets or the economy. In the 2008 financial crisis and its aftermath, that strength meant Berkshire could make deals to help rescue blue-chip companies including Goldman Sachs and General Electric.
And it leaves Buffett equipped to pounce should he find attractive companies to acquire.
Berkshire in January completed its acquisition of Pilot Travel Centers. It has been building stock positions in recent years in five Japanese trading companies. Buffett wrote in his February letter that Berkshire’s unrealized gain from the five was $8 billion at the end of 2023.
But Buffett has admitted that finding really big deals to make is a challenge.
Haruki Toyama, head of large-cap and midcap equity and portfolio manager at Madison Investments, which owns Berkshire shares, said it could make sense for Buffett to think about broadening the range of investments he would consider.
“They’re getting to the point where they’re so big, if he’s constantly waiting for the elephant to bag—that’s his phrase—we think it’s going to get tougher and tougher,” Toyama said. “We do think he has to make some decisions about, OK maybe my A-plus opportunities aren’t there and I have to be OK with an A-minus opportunity.”
Berkshire has used some of its cash to buy back its own shares, increasing remaining shareholders’ stakes in the company. Berkshire spent $9.2 billion in 2023 to repurchase shares, up from $7.9 billion in 2022, according to its annual reports. Some shareholders like that Berkshire can use its spare cash to ramp up those repurchases.
“If the market were to become weak, we think they have incredible firepower to support their own stock by buying back stock,” said VanCronkhite at Allspring Global Investments.
One event that could someday jolt the stock: When Buffett dies or steps back from running Berkshire. Buffett has given no indication that he would consider retiring.
Henry Asher, president of The Northstar Group, which counts Berkshire as its largest holding, says it is possible the next generation of Berkshire management may not be quite as adept as Buffett at moving cash among subsidiaries to put the money to its best use.
“But there’s an awful lot of room to do very, very well and not be as spectacular as Buffett as a capital allocator,” Asher said. “It’s like, would you stop listening to music because Beethoven died?”
Write to Karen Langley at [email protected]