Warren Buffett has been hailed for decades as one of the greatest investment geniuses of all time, but extended underperformance by the firm that he leads as CEO, Berkshire Hathaway Inc. (BRK.A), has been costing him longtime followers at an accelerating rate. One of these is David Rolfe, the chief investment officer (CIO) of Wedgewood Partners, an investment firm with over $2 billion in assets under management (AUM), who has sold his entire Berkshire stake after more than 20 years.

“Thumb-sucking has not cut the Heinz mustard during the Great Bull Market of 2009-2019,” Rolfe writes in the 3Q 2019 Wedgewood Partners client letter. “The Great Bull could have been one helluva of an astounding career denouement for Messrs. Buffett and Munger.” Instead, Berkshire has been a notorious market laggard, as Rolfe writes: "Indeed, since the Great Bull started back on March 9, 2009, Berkshire Hathaway B stock is up a notable +269% through the recent ending 3rd quarter. Over the same time period, the S&P 500 Index is up +370%."

Key Takeaways

  • Berkshire Hathaway's performance has lagged the market for years.
  • A longtime big investor has written a scathing critique of Buffett.
  • This investor sees many errors and missed opportunities by Buffett.
  • He also believes that Buffett should return capital to shareholders.

Significance for Investors

Berkshire's performance in 2019 has been just as disappointing. For the year-to-fate through Oct. 15, both the A and B shares are up by less than 3%, while the S&P 500 has surged by nearly 20%.

Rolfe cites four principal reasons for his loss of confidence in Buffett. These are: botched investments in KraftHeinz and IBM; missed opportunities to buy big winners such as Visa, MasterCard, Costso and Microsoft; a poorly-executed acquisition strategy and failure to do enough big deals; and not returning Berkshire's mountain of cash to investors through stock buybacks and dividends.

Botched Investments. Kraft Heinz Co. (KHC) was formed as a result of a merger backed by Buffett, but the combined company has been a loser, saddling Berkshire with an unrealized loss of more than $1 billion, Barron's notes. Meanwhile, his stake in International Business Machines Corp. (IBM) produced a paltry total gain of less than 5% over the course of 6 years, 2011 to 2017, per GuruFocus.

Missed Opportunities. Rolfe laments, citing these stocks' bull market gains through 3Q 2019: "Mastercard [inc. (MA)] is up a stunning +1,521%. Visa [Inc. (V)] is up a near-stunning +1,137%. Not all is lost, though. Buffett’s two CIO lieutenants currently own both stocks at a combined weight of just a thumb-sucking 1.50% of Berkshire’s current equity portfolio. The current combined weighting should be 15.00%!."

Rolfe continues with these scathing remarks: "Two other layups are Costco [Wholesale Corp. (COST)] and Microsoft [Corp. (MSFT)]. Buffett has had at his disposal unrivaled expert tutelage on each company in his hind pocket for years--but to no shareholder avail. Charlie Munger has been a director at Costco for 22 years. Costco’s stock Great Bull gain is +522%. Once again, not all is lost. Buffett’s lieutenants currently own a whooping 0.55% position in Costco."

On Microsoft, he adds: "More numbing still is Microsoft. Buffett first met Bill Gates nearly 30 years ago. They became fast best friends. In 2004, Gates joined Berkshire’s board of directors. Buffett probably spends more time talking with Gates (Gates Foundation and bridge playing too) each day than he does with key Berkshire vice-chairman employees Ajit Jain and Greg Abel...Microsoft’s stock Great Bull Market gain is +657%."

Looking Ahead

Big public pension funds appear to differ in their views on Berkshire stock. Oregon’s Public Employees’ Retirement Fund (OPERF), the 42nd largest public pension fund in the world by assets, cut its holdings of Berkshire class B stock by 39% in 2Q 2019, by selling 141,822 Class B shares, per Barron's. Their remaining stake of 222,763 Class B Berkshire shares is worth about $47 million at the current price.

New Jersey’s pension system “is in a crisis,” as the president of the state senate remarked in May, per Barron's, which notes that, as of June 30, 2018, the fund’s assets were just 38.4% of its liabilities. Per the same report, the fund bought roughly $100 million of Berkshire class B shares in 2Q 2019. Whether this represents a desperate move or a prescient reaffirmation of Buffett, only time will tell.