Berkshire Hathaway's Class A Shares Plunge 14% Post-Succession Announcement

Since the beginning of May, Berkshire Hathaway's Class A shares have experienced a significant decline of 14%, marking one of the worst performances relative to the broader market in decades. This downturn has raised questions about the sustainability of the "Buffett premium" that has long been associated with the company's stock. The identity of the sellers remains unclear, as these shares have traditionally been held by early investors and their families. Institutional investors and hedge funds will disclose their quarterly holdings later this month, which may provide more insight into the selling activity.

Since the announcement in early May that the company's control would be handed over to Greg Abel, Berkshire Hathaway's Class A shares have fallen by 14%. In contrast, the S&P 500 index has risen by 11% during the same period, highlighting the stark difference in performance. This relative underperformance is one of the worst on record for Berkshire since 1990, reflecting concerns that the "Buffett premium" may not be immediately transferable to the company's successor.

Historically, Berkshire Hathaway has only performed worse during the initial stages of the pandemic, when investors sold off stocks en masse, particularly impacting insurance and financial services companies, which are core holdings of Berkshire. Since taking over the company in 1965, the value investing strategy of buying and holding has generated immense wealth, with Berkshire's cumulative return reaching an astonishing 55,000 times its initial value, far outpacing the S&P 500's return over the same period. This exceptional long-term performance has created a unique "Buffett premium" for Berkshire's stock.

Despite the poor stock performance, Berkshire's operational results remain robust. The company's BNSF Railway, utilities, and manufacturing, service, and retail segments all reported profit growth in the second quarter. Excluding currency fluctuations, Berkshire's operating profit increased by 8% year-over-year. However, these positive fundamentals have not been enough to stem the selling pressure.

Investors have shifted their focus away from Berkshire as a safe haven, particularly after the market volatility caused by the trade wars earlier this year. With concerns about an economic recession easing, capital has flowed back into fast-growing technology stocks. Berkshire's stock price surge earlier this year pushed its valuation to levels not seen since the 2008 global financial crisis, with its price-to-book ratio peaking at nearly 1.8 times, the highest since October 2008.

The recent correction in Berkshire's valuation may present an opportunity for renewed buying. The company halted its stock buyback program in May 2024, with the intention of resuming purchases only when the stock price is believed to be below its intrinsic value. Some investors, such as Christopher Bloomstran of Semper Augustus Investments, believe that the previous overvaluation has been corrected and that Berkshire may soon resume buying back its shares.