By now, everyone and his dog has dissected Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway Inc. (BRK.B, BRK.A) and, not surprisingly, most of the analysis heaps praise on the octogenarian billionaire investor. Some things, admittedly, never change.
Whether you believe his recent performance is good, bad or indifferent, the simple truth is that a 51-year track record gets you god-like status in the world of investment management, and nothing Buffett does in the future is going to alter that perception — nor should it.
If you could only invest in one stock, Berkshire stock would be at the top of anyone’s list. But, if you could invest in only one stock and it had to be a holding company, Berkshire Hathaway is the first pick, the second, third, fourth, fifth … ad infinitum. There are a lot of wannabes out their but there’s only one BRK.
Sure, you can invest in Loews Corporation (L), Brookfield Asset Management Inc (BAM) or Icahn Enterprises LP (IEP) and you’ll do just fine, but if your intention is to invest in a holding company, here are five reasons there is no better holding company than Berkshire Hathaway itself.
Berkshire Hathaway Is a Better Index Than the S&P 500
Berkshire stock has beaten the S&P 500 index in seven of the last 10 years despite this terrible record everyone speaks of. You try running a fund that owns — not has an interest in — 10 companies so large they’d be in the Fortune 500 if they were independent of BRK. Its noninsurance businesses collectively earned $5.7 billion in 2015. Those profits alone would put it 40th in 2015 among the Fortune 500 by that metric.
That’s a far cry from sixth position, where the entire company was ranked in 2015, but even without the insurance, it’s very profitable.
I’ll take the BRK Index over the S&P 500 any day of the week.
Risk? What Risk?
Over the past 13 years, Berkshire Hathaway’s insurance subsidiaries have generated $26 billion in underwriting profits, including $1.8 billion in 2015.
I mention 13 because that’s the consecutive number of years it has been able to deliver underwriting profits, a key objective of any insurance executive. Talk all you want about the insurance float Buffett has access to, but if you consistently are losing money on your insurance operations, then soon enough you’re not going to have a float to access — period.
But in case you’re counting, the insurance float grew 6% on annualized basis in those 13 years from $41 billion to $88 billion. Care to guess what the growth rate was for net investment income over those same 13 years? 1.6%. It might not seem like a lot to go from $3.05 billion in net investment income to $3.73 billion, but over time it has helped give an extra lift to Berkshire stock.
The Banking Exception
Right there on page 20 is a list of Berkshire Hathaway’s top 15 common stock investments, four of which have market values in excess of $10 billion. Berkshire’s common stock holdings in total represent $112 billion in market value. If it were a U.S.-listed ETF, it would be the second largest behind only the SPDR S&P 500 ETF Trust (SPY) whose market cap is $177.1 billion as of March 4.
But there’s a kicker.
Not listed among the 15 holdings is the option to buy 700 million shares of Bank of America Corp (BAC) for $5 billion by September 2021. As of March 3 those shares are worth $9.5 billion, down considerably from the $11.8 billion at the end of December, but still worth much more than Berkshire Hathaway’s option. Better still, it’s getting paid $300 million annually for $5 billion in 6% BAC preferred shares.
What are the odds these shares won’t be worth more in five years time? Slim to none. How can you not love a holding company that seems to have cash spilling from all orifices?
The Brazilian Boys
What do you get when you combine one holding company with another? An investment powerhouse.
Berkshire Hathaway’s relationship with 3G Capital continues to blossom, and investors can expect more deals to arise from the relationship. Consider Warren Buffett to be one of 3G’s in-house lenders and they don’t have a problem raising capital. With a 27% stake in Kraft Heinz Co (KHC), Berkshire Hathaway owns one-quarter of the world’s fifth-largest food company.
3G, as Buffett notes in his 2015 letter to shareholders, is ruthless about finding productivity inefficiencies and stamping them out. You might disagree with the jobs lost using such an approach, but when they shouldn’t necessarily have been created in the first place, it makes the trimming of costs a little easier to take.
Why do you invest in a mutual fund?
So a professional money manager can make the moves you can’t or won’t make to advance your retirement savings. Berkshire Hathaway is no different. In partnering with 3G, it does what a holding company should do, and that’s successfully allocate capital. End of story.
Intrinsic Value of BRK Can’t Help but Increase
Again, using Buffett’s own words to illustrate why there is no better holding company than Berkshire Hathaway, consider what he says about intrinsic value and BRK stock:
“The managers who succeed Charlie and me will build Berkshire’s per-share intrinsic value by following our simple blueprint of: (1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) benefiting from the growth of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large acquisition. Management will also try to maximize results for you by rarely, if ever, issuing Berkshire shares.”
Only by being a holding company with strong, decentralized, in-the-field management can their successors — whomever they might be — hope to be remotely successful. It’s exactly because of this structure that its future is bright.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.