Ever since Berkshire Hathaway (NYSE:BRK.B) purchased Burlington Northern Santa Fe, the “B” shares have been within reach of your typical retail investor. After a 50:1 stock split, a once $3,500/share stock became a $70/share stock that now trades at $127/share. But now that the average retail investor has easy access to Berkshire Hathaway, should you buy it?
Berkshire Hathaway is one of the world’s largest companies with a market capitalization of $311 billion. It is a conglomerate managed by Warren Buffett and his partner Charlie Munger. The team is considered to be one of the best in investing history. Buffett has made fortunes by following a highly disciplined, yet surprisingly “folksy” style of investing that boasts such principles as:
- Rule No. 1: Don’t lose money. Rule No. 2: Don’t forget rule No. 1.
- Be greedy when others are fearful and be fearful when others are greedy.
- It is better to buy a wonderful company at a fair price than a fair company at a wonderful price.
- Stay within your circle of competence (i.e. buy companies that you understand.)
While this is advice that seems fairly simple, the fact remains that Buffett’s performance has been unparalleled. With this in mind, it makes sense to “piggy back” Buffett and to simply buy shares in Berkshire Hathaway. There are other reasons, too. First, Berkshire Hathaway has access to extremely cheap capital. The company can borrow money inexpensively and leverage it up in order to invest it. Most investors do not have that luxury.
Second, Berkshire Hathaway can make deals that most investors cannot. Consider the deal that Berkshire Hathaway made when Bank of America (NYSE:BAC) was struggling in 2011. Buffett was able to secure a 10 percent yield on preferred stock. He was also able to acquire warrants, which appreciate in value as Bank of America’s share price appreciates. Even if the stock doesn’t appreciate he only paid for the preferred stock. Bank of America wasn’t just raising capital. It was buying Buffett’s vote of confidence.