As we begin a new decade, most investors want to put the last decade behind them. In real terms, the stock market actually lost money when measured by the S&P 500 Index. The next worst decade was the 1930s, a period that continues to draw many comparisons with the 1999-2009 era. Believe it or not, what was true for the stock market the past 10 years was not necessarily true for all stocks. One such name is none other than Warren Buffett's Berkshire Hathaway (NYSE: BRK.A, BRK.B).
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Bear Market Performance Matters Most
As many Buffett followers, value investors and Berkshire Hathaway shareholders will tell you, the past two years were not great ones for Berkshire. In 2008, when the market was down nearly 40%, Berkshire shares were down 32 percent. In 2009, Berkshire's 2.7% advance vastly underperformed the S&P 500's 24% upswing. However, like Buffett, investors should focus on two important measurements. First, a year or two of underperformance is not enough to judge the quality of an investment. Second, outperforming in a bear market is a far superior achievement to outperforming in a bull market. On both of those metrics, Berkshire has passed the test. (For related reading, check out How To Outperform The Market.)
A Good Past, A Good Future
So despite the past two years, the past decade has witnessed Berkshire shares advance a total of 76% while the S&P lost money. Going forward, investors may want to consider Berkshire again for the next decade. At the current price of $99,000 an A share, Berkshire trades for 1.2 times book value, which may likely turn out to be vastly undervaluing the assets and earnings power of the company. Investors unable to pony up that price will soon be able to own the B shares for around $66 a share, since they will be undergoing a 50-for-1 split when Berkshire acquires Burlington Northern (NYSE: BNI) in the first quarter of 2010.
Berkshire's value is essentially the sum of its investments plus the value ascribed to the earnings of the insurance and other wholly owned businesses. The value of the investment side took a beating in 2008, but Buffett rebounded smartly in 2009 as names like American Express (NYSE: AXP) and Wells Fargo (NYSE: WFC) advanced strongly. Plus, Berkshire's warrants in Goldman Sachs (NYSE: GS) are now deep in the money, which has fueled the value of the investment side. The uncertainty is that many businesses owned by Berkshire rely on a strong housing and consumer market. As Buffett has readily admitted, those businesses could be in for tough years ahead.
Still A Good Price
No one should invest in Berkshire with expectations that the future performance will be similar to the past few decades - the company is far too big to compound like that. Nevertheless, at the current price, Berkshire shares look set for another market-beating decade.
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