Berkshire Hathaway, the conglomerate led by Warren Buffett, is experiencing a disappointing end to 2023 as its stock falls behind the S&P 500 over the past 10 years.

Lagging Performance

During the current quarter, Berkshire Hathaway's Class A shares have trailed the S&P 500 by approximately nine percentage points. As of now, the stock has only seen a 16% increase in 2023, compared to a total return of around 26% for the index.

Over the past decade, the annualized return for Berkshire Hathaway's Class A shares has been 12%, slightly behind the yearly total return of 12.2% (including dividends) for the S&P 500. The company has also fallen behind the S&P 500 in the last five years, with an annualized return of 13.4% compared to the index's 16.4% return, according to Bloomberg calculations.

Current Stock Position

On Friday, Berkshire Hathaway's Class A shares saw a slight increase of 0.3% and were valued at $542,600, while the Class B stock rose by 0.1% to $356.47.

Berkshire's Performance Over Time

Over the past 20 years, Berkshire Hathaway's stock has performed roughly in line with the S&P 500, with an annualized return of 9.8%. This is notable considering the significant growth in the company's operating profits and Warren Buffett's successful investment in Apple stock, which has resulted in a gain of nearly $150 billion for Berkshire.

Challenges for Berkshire Hathaway

The underperformance of Berkshire Hathaway's stock demonstrates the difficulty even for an investor of Warren Buffett's caliber to outperform an index dominated by powerful mega-cap tech stocks, especially considering Berkshire's massive size with assets totaling approximately $1 trillion.

The reasons for the recent underperformance are unclear. Despite this, the company is on track to achieve record profits in 2023. After-tax operating earnings are expected to increase by over 25% to nearly $40 billion.

Berkshire Hathaway's property and casualty insurance business, particularly its auto insurance unit, Geico, is performing well and undergoing a profit turnaround. Additionally, Berkshire's equity portfolio of $350 billion is outperforming the market this year, largely driven by the success of its investment in Apple, which has seen a 55% gain and accounts for almost half of the portfolio's value.

Berkshire's Valuable Assets

The Burlington Northern Santa Fe (BNSF) railroad, one of Berkshire's key businesses, has seen a surge in value this quarter. This can be attributed to the rally in shares of its chief rival, Union Pacific. BNSF is now estimated to be worth around $150 billion, similar to Union Pacific's valuation. With this in mind, the overall value of Berkshire stands at approximately $775 billion.

In addition to the railroad's success, Berkshire has also benefited from the significant rise in short-term interest rates since the beginning of 2022. Currently, the company holds over $150 billion in cash, primarily invested in U.S. Treasury bills that yield above 5%.

However, some investors may be anticipating lower earnings on this cash in the upcoming year due to speculation about potential cuts in short-term interest rates by the Federal Reserve.

Moreover, there are concerns about Warren Buffett's age. Having turned 93 in August, he acknowledged that he feels "good" but is mindful that he is "playing in extra innings." The recent passing of Berkshire Vice Chairman Charlie Munger at 99 underscores the reality that Berkshire may soon lose its long-standing leader who has built the company over nearly six decades.

While Buffett previously stated his lack of interest in owning Occidental Petroleum, it is important to note that his stance could change. Berkshire's stake in the energy company continues to grow, with the company now owning approximately 28% of Occidental. As Occidental is valued at over $50 billion, Berkshire may still consider acquiring it.

In Warren Buffett's final years as the head of Berkshire, he remains as sharp and engaged as ever. There is still a possibility that he may fulfill his longtime goal of making an elephant-size acquisition, with a target value of $50 billion or more.

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