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Berkshire Hathaway Shares — 3 Pros, 3 Cons

The cash flow machine is in place, but distractions abound


As expected, Warren Buffett had some great zingers at Berkshire Hathaway’s (NYSE:BRKA) annual shareholders meeting.  He dissed Johnson & Johnson’s (NYSE:JNJ) $21.5 billion deal for Synthes because it involved too much stock.  Oh, and Buffett said that it would be Congress’ “most asinine act” if it did not raise the national debt ceiling (and yes, the institution has had many asinine acts!)

Of course, the hot topic at the event was about the controversy surrounding his former protégé, David Sokol, who resigned after the disclosure that he bought shares of Lubrizol (NYSE:LZ) before Berkshire announced the acquisition of the company.  Buffett said it was “inexplicable and inexcusable.”  Yet he did take some of the blame.

However, Buffett made no apologies about the performance of Berkshire.  It is one of the most financially solid companies in the world.

But what about its prospects?  Here’s a look at the pros and cons:


Buffett magic.  Yes, Warren Buffett is a financial genius.  Because of his investment prowess, he has amassed a fortune of $50 billion.  Along the way, he has made many others fabulously rich. 

While Buffett is disciplined in his approach, he realizes that he must be agile.  To this end, he has invested in highly regulated, capital-intensive businesses like utilities and railroads.  So far, the moves have been spot on.

Smart acquisitions.  With huge amounts of cash flow, Berkshire is nicely positioned for acquisitions.  A couple years ago, the company struck a $44 billion deal for Burlington Northern.  True, there was skepticism, but it has turned out to be a winner.

What’s more, Berkshire’s acquisition of Lubrizol was smart.  The company has good earnings power and a top management team.

Diverse platform.  Berkshire’s portfolio spans many key industries like food distribution, manufacturing, insurance, retail and so on.  The firm is also an all-in bet on the American economy.  And if history is any indication, it remains a good bet.


Succession. At 80 years old, Buffett still seems like he’s in his prime.  Unfortunately, there will be a time when he will no longer be at the helm. 

With the departure of Sokol, there is even more confusion as to who will eventually succeed Buffett.  At the annual meeting, he did extol his insurance maestro, Ajit Jain.  But it will be nearly impossible to replace someone like Buffett.

Losses.  Berkshire insures for catastrophic losses, such as earthquakes and hurricanes.  So long as there is strong risk management, the returns can be attractive.

But Mother Nature can be brutal.  Just look at the disaster in Japan, with its massive earthquakes and tsunami.  Because of this — as well as the storms in New Zealand — Berkshire suffered $1.67 billion in losses in the first quarter. This may be the first year that the firm will sustain underwriting losses in 10 years.

Organization.  Buffett takes a decentralized approach to managing his many far-flung businesses.  For the most part, it has worked.  But the problems with Sokol are raising concerns.  Should Berkshire have more controls?  Might there be too many potential risk exposures?


In the financial crisis, Buffett showed his genius when he made investments in companies like General Electric (NYSE:GE) and Goldman Sachs (NYSE:GS).  The problem is that these investment opportunities are mostly gone.  Thus, over the next few years, returns are likely to be muted.

And yes, there is likely to be distraction from the Sokol affair, which may lead to changes in the organization, and there is still much lingering concern about succession.

When looking at these factors, it looks like the cons outweigh the pros on Berkshire for now.

Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli.  He does not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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