Motley Fool Money: Looking Back on Berkshire’s Outperformance Release Date: March 25, 2025 | Hosts: Dylan Lewis, Ricky Mulvey, and Mary Long

Introduction

In the March 25, 2025 episode of Motley Fool Money, hosts Ricky Mulvey and Jim Gillies delve into the impressive outperformance of Berkshire Hathaway over the past five years. They explore the factors contributing to its success, analyze Warren Buffett's investment strategies, compare Berkshire's performance with other major companies like Disney, and highlight standout performers in the current market landscape.

Berkshire Hathaway's Stellar Performance

Performance Metrics

Ricky Mulvey opens the discussion by highlighting Berkshire Hathaway's remarkable growth. Over the last five years, Berkshire's market capitalization has tripled, outperforming the Nasdaq (up ~170%) and the S&P 500 (up ~140%), achieving a 200% increase—a three-bagger in investment terms.

Ricky Mulvey [00:28]: "Nasdaq up about 170% S&P up a little less than 140%. Berkshire Hathaway 200%."

Factors Behind Outperformance

Jim Gillies attributes Berkshire's success to several strategic decisions:

1. Apple Investment: A significant portion of Berkshire's gains stem from its substantial investment in Apple. Even as Buffett has scaled back his holdings recently, Apple remains a cornerstone of their portfolio.

2. Capital Allocation: Berkshire has been adept at allocating capital efficiently, avoiding investments outside their "circle of competence."

3. Long-Term Focus: By adhering to long-term investment principles established since the 1960s, Berkshire has weathered market fluctuations effectively.

Jim Gillies [01:18]: "Buffett has just provided a really good example of I'm going to stay within my circle of competence. I'm going to stay with reasonable valuation."

Cash Holdings: Not a Drag

Contrary to common belief that holding large cash reserves can hinder investment growth, Berkshire Hathaway maintains about one-third of its market cap in cash without it negatively impacting performance. Jim suggests that this cash reserve is strategic, allowing Buffett to seize investment opportunities as they arise.

Jim Gillies [01:18]: "A lot of the cash, while significant, a lot of the performance I think you can probably chalk up to how well the Apple investment worked out for Berkshire."

Buffett’s Investment Strategy and Succession Planning

Misinterpretations of Cash Hoard

Ricky Mulvey brings up a prevalent online theory that Buffett's increasing cash reserves signal an impending market crash, suggesting individual investors should mimic this strategy by selling stocks. However, Jim Gillies disagrees.

Jim Gillies [05:41]: "I think that's wrong. I think it's silly. I think it's misinterpreting what Buffett is doing."

Strategic Positioning and Succession

Jim posits that Buffett's accumulation of cash is less about anticipating a crash and more about preparing Berkshire for the next phase, especially considering Buffett's advancing age (94 years old). This strategic positioning ensures a smooth transition to successors like Greg Abel and Ajit Jain.

Jim Gillies [05:41]: "He's setting up Berkshire for the next leg of Berkshire's growth and Berkshire's history without Buffett at the helm."

Disney’s Underperformance: A Case Study

Financial Slump

Shifting focus, Ricky Mulvey contrasts Berkshire's success with Disney's underwhelming performance. Over the past five years, Disney has delivered a modest 5% return, supplemented by a recent 1% dividend, totaling approximately 6%—lagging significantly behind Berkshire and major indexes.

Ricky Mulvey [09:45]: "Disney, and it's not been a great investment for other people as you've laid out and as I kind of up the ante on."

Challenges in the Entertainment Industry

Jim Gillies explores the reasons behind Disney's stagnation:

1. Reliance on Sequel and Remake Culture: Disney's strategy of producing sequels and live-action remakes has led to inflated production and advertising budgets without guaranteeing box office success.

2. Streaming Losses: Like many in the streaming industry, Disney has faced financial losses. The shift from physical media sales to streaming has eliminated revenue streams from DVD sales, making profitability more elusive.

3. Piracy and Changing Consumption Habits: The ease of accessing content through piracy and the prevalence of free online content have eroded traditional revenue models.

Jim Gillies [09:47]: "Movies are expensive... and you don't have the full box office... So Disney took a bath on that."

Impact of Leadership and Market Dynamics

Jim acknowledges Bob Iger's leadership but notes that broader market changes and evolving consumer behaviors have constrained Disney's performance.

Jim Gillies [09:48]: "What more worlds are there to conquer?...the music industry... artists make almost nothing now unless you're a megastar."

Highlighting Contour Brands: An Underperformer Turned Performer

As the discussion winds down, Jim Gillies introduces an unexpected performer in the market: Contour Brands. Despite facing challenges in 2020, including a temporary dividend cut and declining stock prices, the company has rebounded significantly.

Recovery and Growth

Contour Brands, parent of Lee and Wrangler jeans, is in the process of acquiring Helly Hansen outdoor wear from Canadian Tire. The stock, which plunged to around $12 after hitting $45, has since surged to approximately $65, marking a five-bagger over the five-year period, excluding dividends.

Jim Gillies [16:19]: "It's a $65 company... over five years it's a five bagger before dividends, which are large."

Strategic Acquisitions and Capital Allocation

The acquisition of Helly Hansen positions Contour Brands for continued growth. Jim praises the company's effective capital allocation and strategic moves, which have restored investor confidence and driven significant stock appreciation.

Jim Gillies [16:19]: "They've been very good at allocating their capital. There's a lot to like there."

Conclusion and Final Thoughts

The episode concludes with Ricky Mulvey reaffirming his confidence in long-term investments like Berkshire Hathaway and highlighting the importance of identifying and holding onto strong performers like Contour Brands. The discussion underscores the value of disciplined investment strategies, patience, and the ability to recognize and act upon market opportunities.

Jim Gillies [08:44]: "I think he's setting up because, you know... I own Berkshire because I'm going to let him do that and I'm going to go do something else with my time."

Listeners are encouraged to adopt a long-term perspective, focusing on foundational investments and leveraging strategic insights to navigate market dynamics effectively.

Note: This summary excludes advertisements, intros, outros, and non-content sections to provide a focused overview of the episode's key discussions and insights.