Inside today’s Daily Journal…

For the last two weeks, I’ve been telling you what’s wrong with Berkshire Hathaway.

My thesis is simple. It is very well proven. But it’s the kind of thing you are not supposed to say out loud:

Warren Buffett, the greatest capital allocator in history, has been making bad decisions for 25 years.

In fairness to Buffett, who ran Berkshire for six decades until the end of 2025, things didn’t really go off the rails completely until after the Global Financial Crisis – when he was 80 years old! I’m not suggesting that an 80-year old Warren Buffett was a bad investor. I’m saying that the 80-year old version of Buffett couldn’t hold a candle to the 40-year old version of the same mind. That’s no sin. That’s nature. Father time is undefeated. For 30 years between 1970 and 2000 (between the ages of 40 and 70), Buffett beat the S&P 500 by 11 points per year. Cumulatively, he beat the market’s return by a factor of 48x.

This is the greatest sustained investment performance in history, and no one else comes close.

But… since 2006 Berkshire hasn’t beaten the S&P 500. And last year was the company’s worst year (comparatively) since 1999.

Over the last 20 years, Buffett simply did a terrible job. The largest capital allocations of his late career – Berkshire Hathaway Energy (written down by $50 billion in 2024), BNSF Railway (lowest-margin Class I railroad in North America), Precision Castparts ($10 billion written down), Pilot Flying J (also written down), Kraft Heinz (written down twice!) – were all disasters. And they were all wrong in the same way:

Buffett bought 100% of inferior private operating companies when he could have bought a fraction of the dominant public competitor for less money and gotten a better business that Berkshire didn’t have to manage.

On a capital-weighted basis, Buffett’s largest take-private investments since 2000 have massively underperformed compared to the obvious public-market alternative. The Hershey Company (HSY) instead of See’s Candies. The Home Depot (HD) instead of Mrs. B’s Nebraska Furniture Mart. McDonald’s (MCD) instead of Dairy Queen. NVR (NVR) instead of Clayton Homes. CSX (CSX) instead of BNSF Railway. ExxonMobil (XOM) instead of Berkshire Hathaway Energy (BHE). The cumulative difference comes to roughly $700 billion.

Seven hundred billion dollars.

I knew, when I wrote this analysis, that all of the Buffett fans would accuse me of making an impossible comparison. After all, I have the advantage of hindsight. But that’s not what I did. I used the largest, the oldest, and the most obvious public company analog, at the time. I didn’t “curve fit.” I didn’t try to pick the stock Buffett should have bought. I simply compared his take-private deals to the largest, most established, most obvious public company analog.

What the exercise taught me was something novel, which I didn’t expect when I began the research. Despite getting all kinds of special deals – like high-yielding preferred shares and warrants – Berkshire would have been better off, in every case, if it had simply bought the highest-quality, largest, public company analog.

To prove this, I knew I would need to test it without the benefit of hindsight. That led me to develop Porter & Co.’s own version of Berkshire Hathaway… represented by The Better Than Berkshire Index.

Last year we took Berkshire’s actual asset allocation – 40% Property and Casualty (P&C) Insurance, 20% Manufacturing, Service, And Retail, 5% Energy, 5% Financials, 5% Technology, 5% Railroads, 15% Consumer Products, 5% Healthcare – and inside each allocation “bucket” we replaced almost every Berkshire holding with the highest-quality public-market alternative. These include…

And so on.

Then we tracked the portfolio, in real time, in public. No curve fitting possible. No “if you had bought…” rear-mirror analysis. Live performance.

Here’s what happened:

We beat Berkshire by 12.6 percentage points. Going long our version and shorting Berkshire would have made you equity-like returns with zero risk and zero leverage. While that may not be practical (borrowing costs, friction, etc.), it is proof that our analysis is correct: Berkshire is a lousy conglomerate.

Inside our portfolio, the railroad we said was better than BNSF – CSX – returned 54%. The technology compounder we identified – Alphabet (GOOG) – returned 158%. BWX Technologies (BWXT), our small-modular nuclear bet, returned 95%. British American Tobacco (BTI) returned 40%. Eli Lilly (LLY) returned 30%. The energy bucket we built specifically to capture AI-driven power demand returned 28%.

Where we lost – and where Berkshire lost too – was in the 40% P&C insurance sleeve. Progressive (PGR) fell 24%. Kinsale Capital (KNSL) fell 32%. Our 40% of the index exposure ran straight into a once-in-a-decade soft pricing cycle in P&C insurance. That single sleeve cost us 6.16 percentage points on the year. Without it, Better Than Berkshire would have beaten the S&P 500.

But here is the number that matters the most.

In the last year, Berkshire Hathaway lost to the S&P 500 by more than 30 percentage points (-31.6%).

That is the worst relative result Berkshire has produced in a quarter century. The last time Berkshire underperformed the S&P 500 by more than 30% was the only time it underperformed by that much: 1999, at the extreme peak of the dot-com bubble. Berkshire underperformed by a 40-point gap in 1999.

The market had become temporarily insane about technology stocks, and Buffett refused to participate – and he was right! Within two years the new economy was rubble and Berkshire owned the highest-quality portfolio in the United States. The 1999 collapse turned out to be the greatest buying opportunity Berkshire ever created.

We believe that the artificial intelligence (“AI”) revolution is real. It is going to change everything about the way we live, work, and govern. It’s the beginning of an autonomous robotics revolution that will change the world more profoundly than the industrial revolution did. All of that can happen… and stocks can (and likely will) form bubbles that pop. At some point in the next five years, owning assets that are safe – like the assets in Berkshire’s portfolio – will matter again to investors.

But… I don’t believe owning Berkshire will beat the S&P 500. It has serious structural problems that won’t be solved until the company is significantly restructured. Its biggest problem is a $50 billion misallocation to regulated utilities that have invested heavily in very inefficient energy generation equipment (windmills). Windmills ain’t gonna power robots. That’s not going to happen.

Where Berkshire’s 1999 underperformance was caused by an external mania about an asset class (technology) Buffett refused to own, this time the damage is self-inflicted. There will be no equivalent buying opportunity after the underperformance because the structural mistakes are inside Berkshire’s balance sheet. New Berkshire CEO Greg Abel cannot “sell BHE” the way Buffett sold his airline shares in 2020. And Abel will not spin off the regulated-utility empire he spent his career assembling.

Ajit Jain – the head of Berkshire’s insurance operations, the man Buffett has called the most important manager he ever hired – sold half of his Berkshire shares in September 2024. There’s a reason.

And so… this year… we have a bigger goal in mind. We’re no longer only trying to beat Berkshire. That’s like ganging up on the retarded kid at recess. Going forward, we want to build an ultra-high-quality, ultra-low-volatility, diversified stock index (25 positions) that should beat the S&P 500 with much less risk. The original Better Than Berkshire Index was Berkshire-shaped on purpose – we wanted an apples-to-apples test of our central thesis. The test succeeded. We beat Berkshire by 12 points in real-time, with matching allocations.

Berkshire is locked in. It owns 100% of GEICO, 100% of BNSF, 100% of BHE, 100% of Precision Castparts. When the P&C cycle softens, Buffett (or Abel) cannot reduce Berkshire’s exposure to insurance. When the railroad’s volumes deteriorate, Buffett cannot sell BNSF.

But we are not locked in. Our decision to match Berkshire’s allocations was an experiment, not a commitment. Porter & Co.’s Better Than Berkshire portfolio is built out of liquid public equities that we can rebalance, reweight, and replace once a year. We can respond to the market. We can move against cycles instead of being held hostage by them.

The new portfolio will go to Complete Investor subscribers and Partner Pass members next week.

We are cutting our Better Than Berkshire Index P&C insurance allocation from 40% to 10%. The soft P&C cycle has further to run. We’re shifting that 30% allocation into places I believe will prove resilient to the kind of volatility we may see in tech stocks at some point soon.