Wall Street Has a Doubt – Is Warren Buffett Still a Role Model for Investors?
Berkshire Hathaway's lack of ESG transparency is coming under increasing criticism.
Buffett 38, Wall Street 19.
In the match between Berkshire Hathaway and the S&P 500 (dividends reinvested) since 1965, Berkshire Hathaway has won two years out of three. And even seven times out of ten in the last decade!
The conglomerate of the famous American billionaire investor is well on its way to scoring another point: its share price is down by less than 1% since the beginning of 2022, while its benchmark index is down by 11% (for statistics lovers, it should be noted that in the years when the S&P 500 has fallen, Berkshire Hathaway has performed better in 75% of the cases).
However, the company's latest release was a cause for concern, at least at first glance. The second quarter ended with a net loss of nearly $44 billion, compared to a profit of $28 billion a year earlier …
This collapse can be explained by accounting standards, which Warren Buffett has criticized for introducing a high degree of volatility into the company's results because they force the company to integrate unrealized losses and gains on its financial investments. However, the American market has melted by 16% between the beginning of April and the end of June 2022, led by the acceleration of inflation and the rise of interest rates.
Some of Berkshire Hathaway's portfolio lines have had a rough time.
Apple, the first of them, fell by 22% in the second quarter. Bank of America and American Express fell by about 25% ... This stock market slap could cost Berkshire Hathaway, which has a portfolio of stocks, mainly American, weighing 360 billion dollars.
But as the stock market adage says, “as long as you haven't sold, you haven't lost” ... and you can't judge the performance of an investment over a quarter. Warren Buffett, therefore, remains faithful to his convictions and remains confident in his investment philosophy.
Other investments have proved more resistant, such as the oil group Occidental Petroleum (+3.8% in the second quarter of 2022) which the holding company entered at the beginning of the year. Taking advantage of soaring energy prices, the stock has more than doubled since the beginning of January 2022 - it is, by far, the best performer in the S&P 500 in 2022 -, a gain almost entirely made in the first quarter of 2022.
It should also be noted that, at the end of 2021, Berkshire invested 1 billion in Activision Blizzard, shortly before Microsoft made an offer for the video game publisher. The recent bet on HP seems less obvious to win, while the personal PC market is shrinking. Every move by the behemoth, sitting on a $105 billion cash cushion, provokes debate and comment.
However, at the end of the last quarter, what caught investors' attention most was the good performance of the group's unlisted activities, a wide collection of businesses ranging from energy and insurance to industry and railroads. Despite inflationary pressures, their operating profit climbed 39% year on year to $6.9 billion.
Without being infallible, Warren Buffett, at almost 92, remains an admirable manager. There is no doubt that he remains a model for the investor who seeks performance - the stock has posted a gain of 130% since the end of 2015. At least financial performance, because the businessman seems to pay little attention to extra-financial criteria.
Post-Covid, he has not hesitated to take advantage of the debacle of the airline sector by investing in American companies (at a loss, after all). In recent months, he has increased his exposure to a sector that is much criticized for its role in climate change by taking a stake in Occidental Petroleum, to the point of owning more than 20% (valued at $12 billion), a threshold that allows him to share in the group's results.
Berkshire Hathaway shareholders call for more ESG transparency
Above all, analysts at Moody's - one of Berkshire's holdings! - gave it an ESG score (environmental, social, and governance criteria) of 14 out of 100, far from the S&P 500 average of 37.
On the environmental pillar alone, Berkshire Hathaway received a laughable score of 1 out of 100, due to a lack of communication. Yet it is difficult to ignore the subject in 2022, especially at a time when the United States is taking up the fight against climate change with the vote of 369 billion dollars over ten years earmarked for the ecological transition. Especially since Berkshire's shareholders are taking a stand.
At the last shareholders' meeting, investors proposed resolutions along these lines. One of them asked the company to report on its management of physical and transitional risks related to climate change, a legitimate concern for a group that owns insurance activities. It received almost half the votes, excluding reference shareholders.
A similar score was obtained for the resolution calling for the publication of the conglomerate's greenhouse gas emissions. Is Berkshire Hathaway's position still tenable, including from the point of view of stock market performance, when we see the importance that ESG management has taken? In Europe, the recent example of Sanofi shows that listed companies can no longer ignore these issues.
This is a challenge that must be met if we are to continue to beat the American indices over the next fifty years.
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