Why Berkshire Hathaway is good for your
AS an investor one is always seeking to make gains, as there is simply no other reason to invest. One would hope that an “investment crystal ball” would identify high-yielding investments, but that ball, unfortunately, is yet to be found. Instead let’s direct our attention to a proven security with a wealth of experience and reserves supported by strong fundamentals. This warrants its due consideration and potential addition to your financial holdings.
Berkshire Hathaway Inc (BRK.A & BRK.B) is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States, that oversees and manages a number of subsidiary companies. There are many wholly owned entities within the conglomerate
which include: GEICO (Government Employees Insurance Company), an auto insurance company and the second largest auto insurer in the United States; and BNSF-( Burlington Northern Santa Fe Railway), the second-largest freight railroad network in North America and second to the Union Pacific Railroad which has three transcontinental routes that provide high-speed links between the western and eastern United States.
Its portfolio also contains Lubrizol, a provider of specialty chemicals for the transportation, industrial, and consumer markets whose products include additives for transportation-related fluids, industrial lubricants, and motorised fuel; Dairy Queen — often abbreviated DQ — is a chain of soft serve and fast food restaurants internationally; and Fruit of the Loom is a popular American company that manufactures clothing, particularly underwear.
Helzberg Diamonds is a jewellery retailer founded in 1915 by Morris Helzberg that has 234 stores in the United States.
Berkshire also owns half of Heinz and an undisclosed percentage of Mars Incorporated, an American global manufacturer of confectionery, pet food and other food products with US$30 billion in annual sales. Berkshire Hathaway also has noteworthy holdings in American Express, The Coca-Cola Company, Wells Fargo Bank, and IBM, and averaged an annual growth in book value of 19.7 per cent to its shareholders for the last 49 years (compared to 9.8 per cent from the S&P 500 with dividends included for the same period), while employing large amounts of capital and minimal debt.
It is therefore evident Berkshire would provide your portfolio with security and stability in owning pieces of all the aforementioned companies. Most of these holdings in Berkshire remain an intimate part of our daily lives, and for some makes up a daily economical routine thus confirming its relevance and revenues. Amazing, right? But that’s not all, as the company is known for its control by investor Warren Buffett who is the company’s Chairman, & CEO and Charlie Munger, the company’s vice-chairman. I am sure the name Warren Buffet rings many bells for you, as his investment strategy has reached mythical proportions and many well-known activist/investors internationally seek to emulate him. The story is often told of Mr Buffett’s annual lunch meetings in which investors/fund managers pay upwards of US$2 Million to dine and observe him for one hour. Berkshire’s AGM is a noted event on every analyst’s calendar annually.
The board of directors of Berkshire Hathaway also includes Howard Graham Buffett and Bill Gates who need no introduction, among a few others. With an adequate succession plan in place, Buffett in May 2010 said he would be succeeded at Berkshire Hathaway by a team consisting of a CEO and three or four investment managers; each of the latter would be responsible for a “significant portion of Berkshire’s investment portfolio”; his job at present would be essentially split into three or four upon his demitting office. While the intent of this message was to bolster confidence in the leadership of a “Buffett-less Berkshire”, critics have noted that this strategy of choosing a successor without a concrete exit strategy for the sitting CEO often leaves an organisation with fewer long-term options, while doing little to calm shareholder fear.
Warren Buffett’s philosophy follows the Benjamin Graham mantra of value investing in which value investors seek securities with prices that are unjustifiably low based on their intrinsic worth. There isn’t a universally accepted way to determine intrinsic worth, but it is most often estimated by analysing a company’s fundamentals. Essentially bargain hunters, the value investors seek to identify stocks that they believe are undervalued by the market.
Buffett, however, isn’t concerned with the supply and demand intricacies of the stock market. In fact, he’s not really concerned with the activities of the stock market at all. This is the implication in this paraphrase of his famous quote: “In the short term the market is a popularity contest; in the long term it is a weighing machine.”
Buffett prefers to not seek short-term capital gain but ownership in quality companies extremely capable of generating earnings that he would be comfortable holding forever. When Buffett invests in a company, he isn’t concerned with whether the market will eventually recognise its worth; he is concerned with how well that company can make money as a business. Buffett typically considers only companies that have been around for at least 10 years and famously avoided the ‘Dot Com Bubble’ of 1999 into the new millennium. Currently the most noticeable thing was that Buffett and Berkshire Hathaway is that they are sitting on a record pile of cash… over US$55 Billion of it as at August 2014.
Put in perspective, Berkshire Hathaway has been a recommended “Buy” for Stocks and Securities Limited (SSL) for at least 12 months, and year to date the S&P 500 has returned 5.66 per cent to investors and Berkshire Hathaway (BRK.B) delivered a whopping 16.67 per cent return on investment for investors who bought during said period.
The value-investing style is not without its critics, and whether one is a supporter of Buffett or not, the proof is in the pudding. He is one of the richest people in the world, with a net worth of more than US$53 billion (Forbes 2013). With this said I think the real question is “Why is Berkshire Hathaway not your investment portfolio?”
Andre´ Edwards is a financial advisor at Stocks &
Securities Ltd. Contact: aedwards@sslinvest.com