Suddenly, Warren Buffett Doesn't Look So Dumb
By S.P. Brown

Hard to believe only a month ago the messiah of equity investing, Warren Buffett, was being written off as an anachronistic has-been.

During the first two months of the new year, technology issues were soaring to new heights lead by strong gains in biotechs and semiconductors while Buffett's primary investment vehicle, Berkshire Hathaway (BRKa), was languishing.

Through January and February, the AMEX Biotech Index (BTK) and the PHLX Semiconductor Index (SOX) surged ahead 75 percent. As for Berkshire, it sank 15 percent in the hole.

Granted, even the most sagacious investor could easily have missed on those high-flying, speculative biotech and semiconductor issues, but Buffett also missed on the blue-chip big-caps techs, such as Cisco Systems (CSCO), Microsoft (MSFT) and Intel (INTC), which propelled the Nasdaq Composite Index (COMPX) ahead 30 percent during the first two months of 2000.

Buffett's modus operandi is to focus on businesses he understands (in other words, no technology) that are the leaders in their respective industry or market. For the most part, these businesses have been big-name companies that deliver basic consumer goods and services. Berkshire's largest holdings include Coca-Cola (KO), Gillette (G), American Express (AXP), Freddie Mac (FRE) and Disney (DIS).

Buffett even used to self-deprecatingly joke that "technology is beyond my circle of competency."

In the past, this value/consumer-growth investing strategy has served Buffett and Berkshire's shareholders well. Over the past 30 years, the "Oracle of Omaha" has generated an average annual return of 25 percent.

However, the investing winds began to change against Buffett in the latter half of the 1990s. Berkshire, and its stock portfolio, has underperformed the S&P 500 Index (SPX) over the past six years, during which time, tech-stocks grew to 32 percent of the SPX's market cap.

Recent history hasn't been much kinder, either. Over the past two years, Buffett has suffered his worst investing returns ever.

In fact, over the past year, Berkshire's stock is down a whopping 30 percent relative to the S&P 500 (SPX) and Buffett is suffering his worst relative performance against the SPX during his 35-year tenure as head-man at Berkshire.

Mired in mediocrity, Buffet has had to endure rumblings among the Berkshire faithful that he has lost his well-respected Midas touch.

But, alas, investing is a fickle business. The winds are indeed changing once again, and they seem to be changing in Buffett's favor.

Over the past month, technology has been decimated. The COMPX, BTK and SOX have all lost more than 20 percent in value, while Berkshire's stock has gained nearly 50 percent.

What's more, during the disastrous tech sell-off that occurred on Friday April 14, Berkshire and Buffett held steady. While billionaires like Microsoft (MSFT)) chairman Bill Gates and Amazon.com (AMZN) chairman Jeffrey Bezos lost billions that day, Buffett gained $570 million on his 474,998 Berkshire shares.

Daily wealth calculations aside, people need to remember that Buffett is an investor, not a trader. He doesn't measure his returns on a monthly, or even a yearly, basis. Even after last year's decline in everything not tech-related, Berkshire has still made nearly 10 times its money on Coca-Cola and Freddie Mac and nearly seven times with Gillette. On top of that, Berkshire's second-largest holding, American Express (AXP), was up 63 percent last year (and 472 percent since it was purchased).

Here's something else worth considering: Berkshire has had only four years of relative under-performance against the SPX and not a single absolute decline in value during Buffet's tenure, and that includes the near economic depression that occurred in 1973-1974.

Sure, it would have been nice for Berkshire shareholders if Buffett would have gotten in Puma Technologies (PUMA) and Qualcomm (QCOM) at their bottoms and then have gotten out at their tops, but who actually did that? No one.

And for all the pooh-poohing of Buffet for sticking to his circle of competency, I'd bet there are a lot more investors today who wished they'd have stuck to their circle of competency - and eschewed the likes Puma and Qualcomm - than there were at the beginning of the year.