Should one Buy, Sell, or Maintain Positions in Berkshire Hathaway?
Most investors are familiar with Berkshire Hathaway (BRK.A dropping 1.29%, BRK.B decreasing 1.41%), along with its renowned leader, Warren Buffett. Over the years, Berkshire has managed to deliver approximately 20% annual returns, making it one of the most successful investments during that period.
However, a relevant question arises: Is it too late for your portfolio to benefit from this investment giant? You might be pleased to learn that the answer may not be as straightforward as you think.
Why Berkshire Hathaway is a winner
Before considering whether Berkshire stock is still worth investing in, it's crucial to understand the factors that have contributed to its consistent success over half a century.
Berkshire differentiates itself from its competitors due to its strategic approach to capital allocation. At its core, Berkshire operates a portfolio of insurance businesses. Insurers generate revenue by selling policies and collecting premiums. When a claim is filed, the insurer pays out. Even if the cash inflow and outflow balance each other out, insurers can still rack up profits by investing those premiums until a claim is made, thereby earning interest in the process.
Generally, insurers were quite conservative in their underwriting practices and investment choices. Buffett revolutionized the industry by realizing that he could afford to take on more risks by underwriting more policies and investing the proceeds in higher-return asset classes. Effectively, Berkshire's insurance businesses provided a reliable, low-cost source of permanent capital – an advantage that remains relevant today.
Having a significant amount of capital to invest is not enough to guarantee positive returns. You also need an astute investment team to put that capital to work. In this regard, Buffett is among the best investors of all time. His investment wisdom, coupled with his team's expertise, is largely unmatched in the industry. The combination of Berkshire's capital advantages and Buffett's investment prowess is the primary force behind Berkshire's unprecedented long-term success.
Two reasons why it's not too late
While Berkshire stock may not appear to be a bargain on paper, it's essential to consider two factors that make it an appealing investment option for most investors.
First, Berkshire's book value is artificially undervalued due to share buybacks, which inadvertently lower book value while boosting shareholder value over the long term. This effect is particularly noticeable in cases like Berkshire, which executed large-scale share buybacks at lower stock prices than today's.
Second, Berkshire's structural advantages are here to stay. Its capital allocation strategy remains intact, and Buffett has put in place trusted investment professionals with extensive experience to manage Berkshire's investment portfolio in the coming decades. Berkshire's lieutenants, such as Ted Weschler and Todd Combs, have already demonstrated their capabilities by overseeing some of Berkshire's most significant investments in recent years. After Buffett's departure, significant changes are unlikely to occur.
Is Berkshire stock an excellent buy right now? Probably not. If you're seeking a short-term opportunity, Berkshire is not your best bet.
However, if you're willing to be patient, Berkshire's current premium can be amortized throughout your holding period. After several decades, or even a few years, this premium will effectively average out to nearly nothing. What you'll be left with is a top-tier company with enduring competitive advantages that will persist regardless of whether Buffett is in charge or not.
In the realm of finance and investing, Berkshire Hathaway's strategic capital allocation and Warren Buffett's investment acumen have been key factors contributing to its consistent success over half a century. Despite Berkshire's stock not currently appearing as a bargain, its artificially undervalued book value due to share buybacks and the longevity of its structural advantages make it an appealing long-term investment option for many.
