In this article, we will explore why Berkshire Hathaway, one of the most successful and respected investment companies in the world, sold its stake in Barrick Gold, one of the largest gold mining companies in the world, after holding it for only two quarters. We will also examine what we can learn from this surprising and short-lived investment as shareholders and investors.
Berkshire Hathaway is a holding company that owns a diverse portfolio of businesses and stocks, led by legendary investor Warren Buffett. This very site is all about Berkshire Hathaway. Barrick Gold is a Canadian-based company that operates gold and copper mines in 13 countries. The gold mining industry is a cyclical and volatile sector that depends largely on the price of gold, which is influenced by various factors such as supply and demand, inflation, interest rates, geopolitics and market sentiment.
The main points and lessons that we will discuss in this article are:
- Berkshire's surprise investment in Barrick Gold in Q2 2020, when it bought a $600 million stake amid rising gold prices and economic uncertainty due to the COVID-19 pandemic.
- Berkshire's exit from Barrick Gold in Q4 2020, when it sold its entire stake amid falling gold prices and economic recovery due to the COVID-19 vaccine.
- The lessons learned from Berkshire's experience with Barrick Gold, such as the importance of flexibility and adaptability in changing market conditions, the benefits and risks of investing in alternative assets and cyclical industries, and the role of portfolio managers and their influence on Berkshire's decisions.
By analyzing Berkshire's investment and divestment in Barrick Gold, we hope to gain some insights and perspectives that can help us make better decisions as shareholders and investors in the future.
Berkshire's surprise investment in Barrick Gold
In the second quarter of 2020, Berkshire Hathaway surprised many investors and analysts by buying a $600 million stake in Barrick Gold Corporation (GOLD), one of the world's largest gold mining companies. This move was unexpected because Warren Buffett, Berkshire's chairman and CEO, had previously expressed a negative view on gold as an investment, calling it an unproductive asset that "merely looks back at you".
So what motivated Berkshire to invest in Barrick Gold? According to some sources, the decision was likely made by one of Buffett's portfolio managers, Ted Weschler or Todd Combs, who oversee about $15 billion in assets each. They may have seen an opportunity to profit from the rising gold prices, which reached a record high of over $2,000 per ounce in August 2020 amid the COVID-19 pandemic. Gold is often seen as a safe-haven asset that can hedge against inflation, currency devaluation and economic uncertainty.
Another possible reason for Berkshire's investment in Barrick Gold was to diversify its portfolio and reduce its exposure to other sectors that were hit hard by the pandemic, such as banks and airlines. Berkshire trimmed its stake in several financial institutions, such as JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC), as well as sold its entire holdings in four major US airlines. By contrast, Barrick Gold was one of the few companies that reported strong earnings growth and cash flow generation in 2020, thanks to its low-cost production and high-margin operations, see Barrick Gold's annual report 2020.
Berkshire's exit from Barrick Gold
In the fourth quarter of 2020, Berkshire Hathaway surprised the market again by selling its entire stake in Barrick Gold, worth about $600 million at the time. This decision came after gold prices peaked at over $2,000 per ounce in August and then declined to below $1,800 by November, as the COVID-19 vaccine news boosted investor optimism and reduced the demand for safe-haven assets.
The factors that influenced Berkshire's exit from Barrick Gold were likely similar to those that motivated its entry, but in reverse. As the economic outlook improved, Berkshire may have seen more attractive opportunities in other sectors, such as technology, health care and consumer goods, where it increased its holdings in Q4 2020. Moreover, Berkshire may have wanted to avoid the high volatility and cyclicality of gold mining stocks, which tend to follow the movements of gold prices.
Berkshire Hathaway's exit from Barrick Gold can be seen as a departure from Warren Buffett's traditional investment philosophy, which emphasizes long-term value investing and holding stocks "forever." To better understand the reasons behind the exit, let's analyze how Barrick Gold differed from Buffett's typical investment criteria.
- Dependence on commodity prices: Unlike companies with durable competitive advantages that generate consistent cash flows, Barrick Gold's performance is heavily dependent on the fluctuating price of gold. Commodity prices can be influenced by various external factors such as macroeconomic conditions, geopolitical tensions, and global supply and demand dynamics. As a result, investing in Barrick Gold involves higher levels of uncertainty compared to Buffett's preferred stable, predictable businesses.
- Absence of a durable competitive advantage: Buffett seeks companies with a strong "moat" or competitive advantage that can protect their market share and profitability over the long term. While Barrick Gold is a low-cost gold producer with a robust balance sheet, it does not possess a unique, sustainable competitive advantage that sets it apart from other gold mining companies. The gold mining industry is highly competitive, and a company's cost advantage can be eroded by factors such as rising input costs and new market entrants.
- Short-term bet versus long-term value: Berkshire Hathaway's investment in Barrick Gold appears to have been a short-term bet on the commodity's price rather than a long-term value investment. This move contrasts with Buffett's typical approach, which focuses on identifying undervalued companies that can deliver sustainable growth and value over the long term. By exiting the position, it seems that Berkshire Hathaway did not see Barrick Gold as fitting this profile.
- Inherent risks and cyclicality in the mining industry: The mining industry is inherently cyclical and faces numerous operational, environmental, and regulatory risks. These factors can create volatility in the industry and impact the value of mining stocks like Barrick Gold. In contrast, Buffett generally prefers companies in more stable industries with less exposure to such risks.
In summary, Berkshire Hathaway's exit from Barrick Gold might be attributed to the company's dependence on commodity prices, absence of a durable competitive advantage, and the inherent risks and cyclicality of the mining industry. These factors deviated from Buffett's traditional long-term, value investing approach, which prioritizes stable, predictable businesses with sustainable competitive advantages.
Lessons learned from Berkshire's experience with Barrick Gold
Berkshire Hathaway's investment and divestment in Barrick Gold was a surprising and short-lived episode that offers some valuable insights for shareholders and investors. Here are some of the key lessons that can be learned from this case study:
- The importance of flexibility and adaptability in changing market conditions. Berkshire Hathaway showed that it was willing to change its views and strategies in response to the unprecedented challenges posed by the COVID-19 pandemic. By investing in Barrick Gold, Berkshire sought to hedge against inflation, uncertainty and volatility in the global economy. By exiting Barrick Gold, Berkshire took advantage of the recovery in other sectors and the opportunity to invest in more productive and profitable businesses.
- The benefits and risks of investing in alternative assets and cyclical industries. Berkshire Hathaway's stake in Barrick Gold was a rare foray into the gold mining industry, which is considered a special commodity-type asset class. Gold miners are also highly cyclical and dependent on the fluctuations of gold prices, which are influenced by various factors such as supply and demand, geopolitics, sentiment and speculation. Investing in alternative assets and cyclical industries can provide diversification, protection and leverage, but also entails higher risk, volatility and opportunity cost.
- The role of portfolio managers and their influence on Berkshire's decisions. Berkshire Hathaway's investment in Barrick Gold was likely driven by one of its portfolio managers, Ted Weschler or Todd Combs. These portfolio managers have more autonomy and flexibility than Warren Buffett, who is known for his long-term and value-oriented approach. Buffett has delegated more authority to his portfolio managers in recent years, allowing them to pursue different strategies and opportunities that may not align with his own views or preferences.
In this article, we have discussed why Berkshire Hathaway, one of the most successful and respected investment companies in the world, bought and sold a stake in Barrick Gold, one of the largest gold mining companies in the world, within a span of six months in 2020. We have analyzed the factors that influenced these decisions, such as the impact of the COVID-19 pandemic, the fluctuations of gold prices, the economic uncertainty and recovery, and the opportunity cost of alternative investments. We have also identified and explained some key lessons that shareholders and investors can learn from this case study, such as:
- The importance of flexibility and adaptability in changing market conditions. Berkshire Hathaway demonstrated that it is willing to adjust its strategy and portfolio according to the current and expected market trends, even if it means deviating from its long-held principles and preferences.
- The benefits and risks of investing in alternative assets and cyclical industries. Berkshire Hathaway showed that it can benefit from investing in gold mining as an alternative asset that provides a hedge against inflation and currency devaluation, as well as a source of income and growth. However, it also recognized that investing in gold mining entails significant risks, such as volatility, competition, environmental and social issues, and regulatory uncertainty.
- The role of portfolio managers and their influence on Berkshire's decisions. Berkshire Hathaway revealed that its investment and divestment in Barrick Gold were likely driven by its portfolio managers, Ted Weschler or Todd Combs, who oversee about $15 billion in assets each. This suggests that Berkshire Hathaway is not only dependent on Warren Buffett's vision and wisdom, but also on the skills and insights of its other executives.
We hope that this article has provided you with some valuable information and insights on why Berkshire Hathaway sold Barrick Gold and what we can learn from it.
Appendix: Barrick Gold Transactions
Based on stockcircle.com, Berkshire Hathaway has bought around 20.9 million shares in Q2 2020 at around $25 per share, i.e. a total investment around $520 million.
The exit was in Q3 2020 with 8.9 million shares at around $28.5 and in Q4 2020 with 12 million shares for around $25.3 per share. Hence the exit provided a selling price of around $560 million. We might mock Berkshire for swing trading here, creating a return of about 7.7 percent on $520 million in a few months only.