Is Warren Buffett's Berkshire Hathaway a Buy?

Berkshire has benefited from Warren Buffett's magic touch since 1970 but the company has found it harder going in recent years - and the Sage of Omaha isn't getting any younger

Andrew Willis 9 December, 2019 | 10:49AM
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Warren Buffett

Berkshire Hathaway is the investment vehicle run by legendary investors Warren Buffett and Charlie Munger, but is it an active fund or a just a stock? There’s no doubt that there’s some strategic, active asset management at play with Berkshire, but it’s still one company, exposed to individual stock-specific risks. It’s a stock that holds many companies and has excellent active management that many people like, but still, just a stock.

Four-star-rated Berkshire (BRK.B) has built itself a wide moat, with an edge up on the competition thanks to influential majority holdings and an array of exclusive privately held companies, particularly in the insurance space.

Despite its size – it’s one of the biggest companies on the S&P 500 and – and track record, it’s important that investors recognise that individual company risk remains.

“When investing in a single stock, you’re placing your entire investment in one company’s success,” says Morningstar’s data journalist for investor education, Michael Schramm. “This exposes investors to unsystematic risk—in other words, company-specific risk that a diversified portfolio can reduce.”

Jason Heath, certified financial planner and Managing Director at Objective Financial Partners agrees. “One of the most important factors when investing is to be diversified – to avoid putting all your eggs in one basket. You want to own investments that zig when others zag.”

Funds or ETFs have ‘zigs’ and ‘zags’ occurring within. But with Berkshire – if something happens at the top – say Buffett steps down – the whole holding will zig (or zag).

“While Berkshire Hathaway is a broadly diversified conglomerate, which can help in market downturns, it’s still exposed to unique business risks. For instance, it’s particularly exposed to key-person risk in with Buffett and Munger,” says Schramm.

“Berkshire depends on two key employees, Buffett and Munger, for almost all of its investment and capital-allocation decisions,” notes Morningstar senior stock analyst Greggory Warren, “With Buffett turning 89 in late August 2019 and Munger turning 96 in early January 2020, it has become increasingly likely that our valuation horizon will end up exceeding their life spans.”

Morbid, but definitely something anyone who wants to invest in Berkshire should consider.

Berkshire’s leadership concerns and business-specific operational considerations – such as a need to keep enough liquid assets on hand to cover its insurance liabilities – set it apart from your typical balanced fund, adds Warren.

Not Your Average Stock

But Berkshire is also unlike your average stock and evaluating the benefits of adding it to your portfolio may involve considering it as its own breed.

Investors should start by acknowledging that although it’s special, Berkshire is a stock and needs plenty of company; especially if you’re not holding a balanced fund that holds important allocations in fixed income. Heath recommends holding at least 20 stocks to ensure adequate diversification.

Next, it’s worth considering Berkshire-specific blind spots. “While Berkshire Hathaway is a diversified conglomerate, it lacks exposure to major market segments such as energy, and has big overweightings in areas like financial services and technology,” notes Schramm.

Berkshire also doesn’t offer a dividend – so if you’re saving a spot for income or distributions, it might not be the right bet. However, depending on the type of account you’re holding it in, this apparent downside can turn into tax efficiency.

“Berkshire Hathaway doesn’t currently pay a dividend, which means it’s more tax-efficient than some mutual funds [or stocks] that do distribute gains,” notes Schramm. “But investors should keep in mind that Berkshire’s dividend policy could change.”

“A Berkshire investor gets their return through capital appreciation,” adds Heath.

Harder to Beat the Markets

From a performance perspective, Berkshire’s returned 25% annualised growth since 1965, notes Warren. “Over the long run, it has outperformed the S&P 500, but the outperformance has continued to decline over time. Berkshire hasn’t had a 10-year period of outperforming the S&P 500 since 2002,” says Heath.

“As the company has grown so much in value and as markets have become more efficient, it makes it harder for the big company to beat the markets,” adds Heath.

Berkshire’s class B shares are currently undervalued at a 13% discount to our fair value of US$253.00 a share, currently trading around US$220.50. Berkshire Hathaway A shares are an eye-watering $333,640, which is somewhat offputting for the average investor.

Also (like some fund managers), stagnant performance can be attributed to a “battening down of the hatches” through an increased cash allocation ahead of a potential recession. “The equity bull market that began more than a decade ago is likely to end sometime in the near to medium term,” says Warren.

"To reach your financial goals, you need to ensure that your investments line up with your risk profile and investment time horizon" says Morningstar Canada's Director of Investment Research, Ian Tam. "When you buy a fund, its stated investment objective as defined in the fund prospectus tells you whether the fund lines up with your goals and properly correlates to the rest of your portfolio. Berkshire does not disclose this.

“For example, Buffett and his management team have the authority to increase their cash stockpile. Although Buffett may have a good reason for doing this, the increase in a cash position may not be what you are looking for in the context of your overall asset allocation in particular as it relates to your own financial goals. Certainly one reason you may not want to use Berkshire in place of a fund.”  

Warren sees Berkshire as “a long-term investment idea that is likely to hold up better than most firms in a downturn,” especially given its cache of more than S$100 billion in cash that could be committed to investments, acquisitions, and share repurchases. At the same time, “the company has significantly more illiquid assets on hand than any fund manager could ever muster,” adds Warren.

Let’s be honest, we are one of the people who like the stock. In fact, we think it’s a great stock. Asides from a long legacy of performance that has elevated Berkshire founder Buffett to “prophet” status, today “Berkshire’s diversification, strong balance sheet, capital allocation, excess returns and attractive valuation” make it an appealing buy right now, says Warren.

This article originally appeared on Morningstar Canada


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Berkshire Hathaway Inc Class A613,965.01 USD-0.42Rating
Berkshire Hathaway Inc Class B407.11 USD-0.56Rating

About Author

Andrew Willis  is Senior Editor for Morningstar Canada

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