School’s Out... Forever

3 PM has always been a significant time of the day. Looking back on our childhoods, the hand on the clock in the classroom seemed to turn slower after 2:30 as it made the uphill climb to the end of the school day at 3 PM.

In our adult lives, there’s the afternoon dip, which usually sets in around 3 PM when we grab a cup of coffee to help slow the downhill pace of mental alertness. In Christianity, 3 PM is also a significant time as it is considered the time that Jesus died on the cross.

In the last year, 3 PM has taken on new significance. A year ago tomorrow, after a five-hour Q&A session at Berkshire Hathaway (BRK-B)’s 60th annual meeting, Warren Buffett decided it was time. For six decades, Buffett treated the world like a classroom, remaining not only a dedicated student but also an effective and patient teacher.

Besides managing capital as well as anyone who ever lived, his legacy of educating millions of investors on the virtues of discipline, logic, and the compounding power of time will endure just as long as his track record.

But at 3 PM on May 3rd, Buffett finally rang the bell, and school was out. He ended the meeting by saying, “I think the time has arrived where Greg should become the Chief Executive Officer of the company at year end.” With that, the most successful investment run in American history came to an end, dismissing his students and setting the stage for a new era.

They say the market never rings a bell at the top, but Buffett’s announcement last year was as close as you can get. While markets were closed when he announced his retirement, when they opened for trading the following Monday, shares of Berkshire Hathaway (BRK-B) immediately gapped lower and kept dropping from there.

On the Friday before Berkshire’s 60th annual meeting, the stock closed at an all-time high, and three months later, it was down around 15%.

In the nine months since then, they haven’t recovered any ground.

Relative to the S&P 500, the reversal looks even more extreme. Shares of BRK/b handily outperformed the S&P 500 in the run-up to Buffett’s last meeting, and then plummeted right after, and the stock now sits at multi-year lows on a relative strength basis.

The charts below illustrate what a tough year it has been for Berkshire.

With a 12.3% decline between annual meetings, the stock is on pace for its fourth-worst performance between meetings since at least 1985.

It’s interesting to note how the stock had a 14-year run of positive returns following its 1985 meeting through the year after its 1998 meeting, and since then, returns have been much less consistent, or more normal.

Students of history will remember that the prior peak period of underperformance for BRK/b preceded the 2000 peak in the stock market. Berkshire investors probably wish they could ask their teacher what he thinks, but unfortunately, the oracle won’t be speaking this year, and he hasn’t posted any office hours either.

3 PM will never be the same.