Some of Warren Buffett's big stocks bets have tanked in 2014, and the market hasn't let it pass unnoticed. In fact, anytime a stock Buffett owns declines, the "billions being lost" by Warren makes it into the headlines.
With all the fuss over Warren Buffett's stock-picking prowess, or lack thereof, you might think Berkshire Hathaway has suffered mightily. You'd be wrong, though—way wrong. In fact, Buffett has plenty of reason to smile: Berkshire Hathaway is crushing the S&P 500.
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First, a recap of the bad news:
- British supermarket chain Tesco took a nosedive and has accounting issues. (Buffett dumped it after his ill-timed bet.)
- Some stalwart U.S. stocks owned by Buffett, including Coca-Colaand Exxon Mobil, have limped through the latter stages of the bull market.
- Most notably, IBM, which Buffett placed his first big technology sector bet on—and at what skeptics say was a lofty stock multiple—is now under fire for failing to deliver on earnings and being little more, in the skeptical view, than a fading stock reliant on buybacks and dividends.
- And just last week, The New York Times noted that Chinese electric car maker BYD—in which Buffett has a significant stake—was tanking.
But now the good news for Buffett. While he may prefer to compete with the index on growth in book value of shares (and act as if all S&P dividends were reinvested when he runs the numbers, since he does not pay a dividend himself), Berkshire is way ahead of the index in market return this year. The S&P 500 was up 12 percent through Monday's close. Berkshire Hathaway, meanwhile, has generated a 28 percent return year-to-date.
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In the prior two years, Berkshire ran basically neck-and-neck in stock performance with the index, barely losing out to the S&P 500 total return in 2013, while earning a narrow victory over the index in 2012, according to Morningstar data.
What's to explain the divergence between Buffett's stock and stocks? While the headlines may not overstate the actual size of potential losses on individual stocks, they do overstate the importance of those losses to Berkshire Hathaway as a corporation. "Most investors overestimate the significance of Berkshire's equity portfolio," said Meyer Shields, Stifel analyst.
The bigger Berkshire gets, the more comments made by market pundits, including Buffett himself, on the difficulty he faces in trying to beat the S&P 500. But Shields said, "I also think investors have moved past the 'disappointment' of Berkshire's underperforming the S&P 500 over a five-year period, which probably contributed to past years' underperformance."
This article originally appeared in CNBC.
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