Berkshire Hathaway vs. Ark – two ideas about how to invest

Wider stock markets have been experiencing a correction in 2022 with the S&P 500 seeing c. 10% lower levels compared to their year-end values – even though they have rebounded somewhat ever since. The fall in the overall indices has impacted the so-called growth stocks more compared to the value ones. 

Growth stocks are companies that are expected to demonstrate a better-than-average growth in earnings and profit in the future. However, these companies could be in their early growth phase and might not currently generate any profit at all. However, there is widespread belief among growth investors, that these companies are going to become very profitable in the future and this is a very important factor when they are being considered as potential investments. Growth names are usually – but not necessarily – tech companies such as Tesla, Amazon, or Netflix. A higher interest rate and inflationary environment will mean that their earnings – that they are expected to generate in the far future – will be discounted by more, thus higher rates will mean substantially lower valuations for growth stocks.

On the other hand, value investments are mostly tried and tested companies with solid fundamentals that seem to be undervalued i.e. their share price is lower compared to what their ‘true value’ is approximated to be. Value stocks often appear in more traditional industries such as energy or banking and they generally fare better in a higher interest rate environment.

Currently, as we are looking at a period of increasing interest rates as a central bank reaction to increased inflation, growth companies are seeing their potential future profits lowered, followed by their share prices. As a consequence, investor money is currently ‘rotating’ out of growth into value stories, further exacerbating the price drop of these companies.

Ark Invest, headed by Cathie Wood, is a U.S. asset management company that is best known for very strong convictions in disruptive growth companies in areas like artificial intelligence, robotics, fintech, and blockchain. Even though these technologies are definitely transformative, they are often unproven and unprofitable at the moment. Their flagship fund, the ARK Innovation ETF (Ticker: ARKK) has performed exceptionally well in past years, and more than tripled its stock price between January 2020 and February 2021 as its underlying stocks skyrocketed in value. However, the recent sell-off in growth stocks has cut ARKK stock price by 22% year-to-date and it dropped to less than half of its price when compared to the peak last February, cutting its gains to ‘only’ c. 30% over the past 25 months.

On the other end of the investment spectrum is Berkshire Hathaway, Warren Buffett’s investment firm, following a strict value strategy. Berkshire opts to have large positions in established names such as Apple, Bank of America, or Coca-Cola. In a famous statement, Mr. Buffett once said that one should invest in a way not to care if the stock market will be shut down for the next ten years or not. What he meant is that the strong fundamentals of a good company will eventually have to be reflected in its share price, and investors should not be jumping in and out of stocks but rather choose good companies that are reasonably priced and hold them for the long term.

At the beginning of this year, when ARKK substantially dropped in price, Berkshire’s shares climbed 2%, supported by the uptick in value shares, and reported a 35% increase since January 2020. As such, they outstripped ARKK shares’ performance over the same period. In a 2 year investment period, the two investments yielded very similar returns – albeit Berkshire achieved this with much less variance i.e. exposed risk to its investors.

In my opinion, a manager or investor definitely has a conviction towards one of these strategies and cannot considerably deviate from it. They either follow a value or a growth investment style, this generally is a deep-rooted belief. On the other hand, investor value could be created if they attempt to temporarily skew their approach somewhat, based on their macro expectations. In the current environment, investors should probably be a bit more like Mr. Buffett.

Disclaimer: This article was written by Tamas Jozsa, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view, and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.