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.
Third, when Berkshire Hathaway announces a position the stock usually rises a few percentage points, which makes it more difficult to do as well as the company. Fourth, Berkshire Hathaway owns businesses that cannot be replicated. Some examples include:
- Geico, one of the world’s largest auto insurance companies.
- Burlington Northern Santa Fe, which is a part of an effective duopoly with Union Pacific (NYSE:UNP) in the rail transport business in the western part of the United States.
- Heinz, which is one of the most popular condiment brands in the world.
Fifth, Berkshire Hathaway can move profits earned by one business into another business that needs it tax free. You cannot do that in your own portfolio.
Nevertheless, there are reasons to be hesitant as well. First, Warren Buffett is 83 years old. There is no telling how much longer he will be able to run Berkshire Hathaway. He may die or choose to retire before his faculties diminish. When this happens the stock is going to fall, and it could fall a lot. If it falls to book value then it would fall by a third.
Second, Buffett is not infallible. I think he has made some questionable business decisions. For instance, I disagree with his position in IBM (NYSE:IBM), which has seen declining revenues and profits. Management has used its capital to repurchase stock aggressively at record high prices despite the fact that this capital could have been used to expand.
Third, given Berkshire Hathaway’s size, the company is limited in the market moves it can make. An individual investor or a smaller company with a similar business model can make a game changing investment in a company with a $500 million market capitalization. But with a $312 billion valuation, Berkshire Hathaway cannot do this.
Fourth, Buffett has some rules that seem too rigid such as “don’t buy gold or technology stocks.” Gold has outperformed Berkshire Hathaway over the past 10 years, and since the turn of the century, and there are technology stocks that have drastically outperformed Berkshire Hathaway. Such rules might make sense from Buffett’s perspective, but I see them as restrictive.
Given all of these points, Berkshire Hathaway is intriguing. But at the same time, I think I would rather cherry pick some of Buffett’s investments than purchase the good with the bad.
Disclosure: Ben Kramer-Miller owns gold coins.