On May 3 at the Berkshire Hathaway annual meeting — you know, the “Woodstock for Capitalists” — Warren Buffett announced he would finally be stepping down at the end of this year. Greg Abel will have the biggest capital-allocation shoes in the world to fill, with the market having been told about this broad succession plan for some time.
The famously expensive Berkshire Hathaway A shares (you can buy the B shares as an alternative) traded at more than $809,000 a shot on Friday May 2. By the time the market digested the news of Buffett’s departure, the shares were down 5% by close of play on the Monday. Here we are, three months later, with the shares trading at $711,500, 12% lower than before the announcement.
The initial move was obviously linked to him stepping down, but has the subsequent drop been due to broader tariff issues, specific risks in the Berkshire portfolio or persistent concern about Buffett handing over the reins? To find out, we can compare Berkshire’s performance against appropriate equity benchmarks, while bearing in mind that Berkshire has billions invested in fixed income instruments as well.
On a year-to-date basis, Berkshire is up 4.4% and an S&P 500 ETF is up 6.1%. But since May 2, the ETF is up 9.7%. Even using the closing price on Monday May 5 (in an effort to base Berkshire after the retirement “shock”) doesn’t change the outcome, as Berkshire is down 7.6% since that date and the ETF is up 10.3%.
This is making a strong case that Berkshire’s share price pressure is largely related to Buffett. And even if we expand the analysis to include other indices such as the Dow Jones industrial or the Dow Jones US financials, we get a similar answer in terms of underperformance by Berkshire.
Moving on to the tariffs, does the latest earnings transcript hold any clues? Fun fact: there is no quarterly earnings call and hence no transcript. Buffett has famously only held annual meetings, which means investors have to rely on the earnings report each quarter. Buffett only got away with this because of his reputation, as the world is accustomed to peppering management with questions every three months. If the share price pressure since Buffett’s departure announcement is anything to go by, Abel won’t be given anywhere near the same leeway by the market.
So, where is the problem? The answer lies in the investment gains, which are far more modest than in the comparable period
In the report for the quarter ended June, the word “tariff” appears only five times. And if we look at results from operations excluding investment gains and losses and impairments (in other words, if we isolate Berkshire’s unlisted portfolio), quarterly earnings were up 2.6% year on year. Over six months, they are down 1.2% year on year. The tariffs are largely absent from the report because they don’t seem to be having much effect on the numbers in Berkshire’s underlying portfolio.
So, where is the problem? The answer lies in the investment gains, which are far more modest than in the comparable period. But even more than that, the 27.4% stake that Berkshire Hathaway holds in Kraft Heinz has been a horrible story for Buffett. Berkshire was instrumental in the merger between Kraft Foods Group and HJ Heinz Co in 2015. Since then, Kraft Heinz has ridden a rollercoaster, with the share price losing two-thirds of its value since the 2017 peak. The impairment in this quarter of $3.8bn comes after a 22% drop in the share price over the past 12 months and an assessment by Berkshire that the share price pressure is here to stay. Tariffs may be part of the issue for Kraft Heinz, but they certainly don’t account for a decade of pain.
In Buffett’s final year at the helm, Berkshire Hathaway finds itself in a perfect storm. The listed equity portfolio is under pressure, with even Apple as the wrong tech exposure this year. The unlisted portfolio is growing, but not by much. There are some particularly worrying underlying equity positions that are offsetting the growth elsewhere. And of course, there’s the small matter of Buffett himself stepping away.
It’s likely that Buffett’s closing act is going to be a significant disappointment for him. It’s a pity, but the markets aren’t known for being charitable, or for operating with any kind of nostalgia. On the plus side for Abel, he will have an easier base for comparison when he takes over!
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