Portfolio X-Ray: Berkshire Hathaway

Note: Read this introduction to see what I am doing in this series.

About Berkshire Hathaway
Anyone that knows anything about the market has probably heard about Berkshire Hathaway (NYSE: BRK-A, BRK-B), or at least its Chairman and CEO Warren Buffett. But not a lot of people truly know what Buffett’s company is.

In simple terms, Berkshire Hathaway is a massive conglomerate that owns many companies in multiple industries; to get an idea of some of these companies, take a look at this page. But Berkshire Hathaway has its origins as a textile mill in Massachusetts, which Buffett used as a jumping off point to invest in multiple companies, most famously being his investment, and subsequent purchase of insurer GEICO. The Berkshire Hathaway/Warren Buffett story has been told many times, though perhaps the best is told by The Snowball: Warren Buffett and the Business of Life by Alice Schroeder, often considered the “official” Buffett biography.

Why is Buffett so famous, and why do people tend to listen when he speaks about markets? It might have something to do with Berkshire Hathaway’s nearly 20% compounded annual gain since 1965, a return that has doubled the S&P 500 during the same time. The non-annualized return is nearly 600,000%, and had you been able to and had the foresight to invest $1,000 in Berkshire Hathaway in 1965, you would have over $10,000,000 today. Quite an impressive run.

Why I Invested
I have owned Berkshire Hathaway in the past before I was really serious about investing. When I made my last investment* in the company, I outlined three reasons why I thought it was a great base for mine or most any portfolio, and those reasons are still a good place to start when looking at Berkshire Hathaway.

*It should go without saying that I purchased “B” shares of the company, as I am not a wealthy person and cannot afford even one “A” share, which were trading at $117,850 a share when I made my last investment. 

Reason number one was, and still is, Warren Buffett. At the age of 82, Buffett is actively running the company, always on the lookout for the next big company to acquire or the next great investment. I realize that he won’t be there forever, but I feel that he has put managers in place that will continue the legacy of the company long after he is gone should he leave this life sooner rather than later.

Outside its wholly-owned subsidiary companies, a bet on Berkshire Hathaway is also a bet on the stock portfolio that Buffett had a strong hand in building, which includes large stakes in Wells Fargo, Coca-Cola, IBM, and American Express among many others. Though he has started to hand off some of the investing to Todd Coombs and Ted Weschler, two hand-picked “successors,” the larger moves in Berkshire’s portfolio still have a Buffett feel to them.

Reason number two also still applies. Berkshire Hathaway’s stock is no longer at the historically cheap levels that it was at early last year, but it is still only trading for a respectable 1.4x its book value, which is remarkable for a company of its size. For example, Google (Nasdaq: GOOG), which has about the same market cap as Berkshire Hathaway, currently trades for 3.7x book value. However, a better comparison might be a company like General Electric (NYSE: GE), which is also a conglomerate, and currently trades for just over 2x its book value.

The third reason is the only one that may not apply nearly as much as it did in January 2012. While I personally think that the housing recovery still has a way to go and Berkshire will continue to benefit from it, it just doesn’t factor that much into my investment decision anymore. The company would do fine without a housing recovery, as the past few years have shown, so any improvement would simply be icing on an already very tasty cake.

When I Would Sell
I hate to say that I will never sell, but if there is any company currently in my portfolio that I feel is “buy and forget,” it might be Berkshire Hathaway. The only thing that any Berkshire investor should be wary of is the inevitable death of out Oracle of Omaha, which is bound to happen at some point, right? Nevertheless, with a company the size of Berkshire, and the autonomy afforded its subsidiary companies, it stands a great chance of continuing to chug along for a very long time. Once Uncle Warren does leave us, it will be time to check on the company and make sure his successor is still following the principles that made Berkshire great to begin with, then continue to hope for strong performance. Finally, I will definitely sell off my lowly “B” shares if I every get the opportunity to buy even one “A” share, but that will take some time.

Until next time…