By
Dear Warren:
So sorry to hear that your investments are having a tough time of it this year. I thought this note might cheer you up a bit, and also serve as a recap for the performance of the Beating the S&P Portfolio (BSP), which I suspect you follow with keen interest.
You're no doubt acutely aware that, as of yesterday, the stock price of your company, Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A)") else Response.Write("(NYSE: BRK.A)") end if %>, has dropped 23.7% this year. The Standard & Poor's 500 Index, our performance yardstick, has gained 14.2%. Ouch, Warren!
Berkshire Hathaway has taken quite a hit this year in some of its long-held positions in your favorite companies. Coca Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>, Freddie Mac <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %>, and Walt Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> all have lost money for their shareholders this year.
As I'm sure you're also aware, the stocks in Berkshire's portfolio share many similarities to those in the BSP Portfolio. Gillette has been a BSP staple this year, as has Coke arch-rival PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>. Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %>, practically a sister to Freddie Mac, is in many a BSP portfolio. Like your Wells Fargo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFC )") else Response.Write("(NYSE: WFC )") end if %>, we've also owned banks. Both Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> and Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> are currently on the BSP list of stocks to buy.
I know it's little consolation, but the BSP Portfolio has had a rough year as well. Again as of yesterday, here's the year-to-date returns for the five BSP stocks, assuming they'd been bought at the beginning of the year:
Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> +19.7%
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> +19.6%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %> -25.5%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -14.2%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> -11.9%
Beating the S&P -2.5%
Berkshire Hathaway -23.7%
Standard & Poor's 500 Index +14.2%
So, although BSP is kind of whipping you this year, we're not exactly tooting our horns here at BSP Central.
In looking for the source of our problems (i.e., excuses!), I've noticed just how poorly value stocks in general have performed relative to growth stocks this year. BSP, like Berkshire, will never own those explosive technology stocks that have skyrocketed recently. Our boring and (hopefully) undervalued companies like banks, consumer products, and automobiles have performed well for us in the past, and we're not about to give up on them because of one mediocre year.
To see just how poorly the value style of investing has performed relative to the growth style this year, you might be interested in the S&P Barra Indexes, which divide the S&P 500 stocks into those with characteristics of either value or growth. The Vanguard Index Value and Growth Funds aim to duplicate these two indexes. Here are the results to date:
Vanguard Index Value +7.8%
Vanguard Index Growth +22.6%
Growth-style investing has definitely been in the vanguard recently. Since value and growth styles go in and out of favor, we'll probably get our revenge sooner or later. I'm sure you remember the dark days of 1973 and 1974, when the market was reeling. The S&P 500 lost 14.7% and 26.5% in these two years. The Foolish Four, a sister strategy to BSP, actually gained 17.3% and 20.0% those years. Our time will come again soon.
Alas, it looks like the BSP winning streak will end this year. BSP has beaten the S&P 500 each year for the last six consecutive years, a streak dating back to 1993. I hear you've got an even longer streak that is coming to an end as well. According to Bloomberg news, 1999 will be the first year since 1980 that the change in Berkshire Hathaway's book value won't beat the returns of the S&P 500. You might recall that 1996 was the last year Berkshire's stock returned less than the S&P 500 as a whole, gaining 6.2% versus 23.1% for the S&P.
So, at least for this year, the party's over. We knew it couldn't last forever. Since you're generally recognized as the consummate buy-and-hold investor, I thought you'd appreciate these longer-term results. I could only dig up reliable information on Berkshire stock going back to 1991. Since then, here's the annualized returns:
Berkshire Hathaway +26.3%
Beating the S&P +25.4%
Foolish Four +25.7%
S&P 500 +20.3%
It looks like you're in a neck and neck race with us Fools for the blue ribbon, Warren!
And what do you, the Oracle of Omaha, see in the crystal ball for next year? Here at BSP Central, we're staying the course. The current BSP stocks (the ones you'd buy if you were to invest as of yesterday) all are verifiable dogs that have lost out to the S&P 500 this year. In fact, these stocks (Bank One, Gillette, Ford, PepsiCo, and Bank of America) have all lost money for their shareholders this year.
Because these beaten-up companies are financially strong, market-leaders, we fully expect them to have the wherewithal to pick themselves up and rejoin the party next year. You said it best, in your 1990 letter to Berkshire shareholders:
"The most common cause of low prices is pessimism -- some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer."
In fact, we've shown that companies that remain on the BSP list a second consecutive year tend to do quite well as a group the following year. Ford and Bank of America are two current examples of these kinds of companies.
Finally, Warren, don't you think you're going a little overboard on this issue of stock splits? We know you don't believe in them, but the stock price of your Berkshire class A shares is getting a little ridiculous at over $50,000 a share. Even if your company did pay a dividend (it doesn't), there's no way it could ever become a BSP stock if you keep this up. Even if we use an RP rating system to choose the BSP stocks, Berkshire's yield would have to be about 115% before it would become a BSP/RP stock. It doesn't look promising.
Congratulations on your election as the "Top Money Manager of the 20th Century" in a recent survey of over 300 investment professionals. You beat Peter Lynch and many others, hands down. Sure, you've been on many other lists in the past, including the Forbe's list as the world's second wealthiest man. Might I take this time to gently remind you that, although The Motley Fool Charity Drive is going well, an extra million dollar contribution probably would make it go a whole lot better?
I hope 2000 finds you in good health, and may both Berkshire and BSP profit in the new millennium.
Foolishly,
Ethan Haskel
Beating the S&P year-to-date returns (as of 12-14-99):
Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> +19.7%
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> +19.6%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %> -25.5%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -14.2%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> -11.9%
Beating the S&P -2.5%
Standard & Poor's 500 Index +14.2%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +23.9%
S&P 500 +17.5%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $160,000
S&P 500 $80,400