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Over his mutli-decade long career, Buffett has managed to outpace the broader S&P 500 by a comfortable margin.
In recent years, however, it has become glaringly clear that Buffett's portfolio has lost some of the advantage it once had. In both 2009 and 2010, the per-share book value of Berkshire struggled, underperforming the benchmark S&P 500.
For some this lagging performance has likely chipped away at the investor's appeal. However it is important to note that such action is not surprising given the growing size of the Berkshire Hathaway investing empire.
As I've noted on a number of occasions, Buffett can no longer rely on small, under-priced companies to move Berkshire Hathaway's (BRK.A)
Instead, in order to make a dent in the portfolio's performance, the investor must turn to large, well-established companies. This helps to explain both Buffett's massive cash reserves and the size and prices paid for recent acquisitions such as Burlington Northern Santa Fe Railroad.
Buffett appears to have accepted the fact that this new large-cap focused investing strategy will affect the company's strength during times of market optimism. Comparing the firm against the S&P over time in his annual letter to shareholders, the investor noted that the performance was "quite good in early years and now only satisfactory." The investor went on to state that, "...the bountiful years, we want to emphasize, will never return."
Although Berkshire's upside potential has become limited by the company's sheer size, the investor's portfolio has not lost its luster. On the contrary, the firm's strengths have merely shifted and evolved; today's Berkshire Hathaway has taken on a defensive persona.
Armed with exposure to large, liquid companies hailing from across the market spectrum, the Berkshire Hathaway portfolio appears well positioned to weather storms on the horizon.
Given the market's recent patch of volatility and the sweeping challenges that still face many corners of the globe, employing a similar defensive portfolio strategy will be a solid idea for conservative minded investors as we move into the second half of the year.
Those looking to follow Buffett's lead, however, do not have to turn to a firm like BRK.A to mimic the billionaire's investing preferences. Rather, an ETF like iShares Dow Jones Select Dividend Index Fund
Like Berkshire Hathaway, DVY taps into companies hailing from across nearly all corners of the markets, dedicating the majority of its portfolio to large-caps. The fund's largest holdings include Lorillard
Although his firm's investing focus has shifted over the years, Warren Buffett remains an important and influential member of the financial industry. In the months and years ahead, I fully expect that individuals will continue to turn to this Nebraska native for both his investing advice and general outlook.
