Why Buffett's Berkshire Hathaway Is Still A Great Long-Term Holding

Why Buffett’s Berkshire Hathaway Is Still A Great Long-Term Holding

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Berkshire is the #8 stock in the S&P 500 and #1 in the S&P Value Index; it’s a highly diversified conglomerate with a large position in Apple.

Berkshire’s business model is unique, with decentralized operational management and centralized capital allocation; its Big Four businesses are insurance/reinsurance, BNSF, Apple shares, and BHEnergy.

Berkshire has outperformed the S&P 500 20% to 10% annualized over 55 years, trailed over the past ten years, led over the previous decade and leads this year.

Berkshire is hard to analyze because its businesses require different methods of analysis and are inter-connected in subtle ways; to summarize, it has solid growth at a reasonable price.

With no dividend, buybacks are key and enable a manufactured dividend while generating growth in the percentage of ownership of assets and earnings.

Mark Wilson/Getty Images News Berkshire Hathaway ( BRK.A )( BRK.B ) is the eighth largest company in the S&P 500 as measured by market capitalization. You can see this and other market cap rankings updated daily in the Vanguard S&P 500 Index ETF ( VOO ). All seven of the companies with a larger market cap than Berkshire – Apple ( AAPL ), Microsoft ( MSFT ), Alphabet ( GOOGL )( GOOG ), Amazon ( AMZN ), Facebook ( FB ), Tesla ( TSLA ), and NVIDIA ( NVDA ) – are technology-driven rapid-growth companies which have risen to prominence over the past two decades. While Berkshire itself is not a technology company, it owns 5.4% of Apple. Apple is the largest position in its publicly traded portfolio at around 40% of portfolio value. Berkshire as a whole compounds its overall value with an internal rate of return (netting out cash) of over 10%. That’s solid moderate growth. As “value” and “growth” are defined in indexes, Berkshire is classified as a “value” stock. It is in fact the number one stock by market cap in the Vanguard S&P 500 Value Index ETF ( VOOV ).

Berkshire Hathaway is a conglomerate. It is made up of dozens of subsidiaries in a wide variety of industries along with that large portfolio of publicly traded stocks. Conglomerates often sell at a discount to the aggregate value of their parts. This is in large part because in the first era of conglomerates – the 1960s and 1970s – conglomerates were put together in a slipshod fashion, often using their own overpriced stock or heavy borrowing to keep making acquisitions. They were in effect a Ponzi scheme of sorts, and many conglomerates of that era eventually collapsed. Berkshire could not be more different. It was carefully put together by Warren Buffett from best of breed businesses which have a powerful synergy. The conglomerate discount should be taken as a gift to investors who can invest in a wonderful company at a value price.

A quick review of the basics would be incomplete without a brief discussion of Berkshire Hathaway’s two share classes – A and B. The A shares are the original shares going back to 1965. Currently trading at $436,198 as I write this line, they can be converted into B shares at a ratio of 1 to 1500. Some holders of the A shares go back to the days when Buffett dissolved his Partnership and allowed those who wished to take their capital out as shares of Berkshire Hathaway. Those who did so hold the A shares today with a cost basis of $29. While A shares are readily convertible into B shares, B shares cannot be converted into A shares. The two share classes generally trade in virtual lock step at the ratio 1/1500. Every once in a while a single trade in the A shares may diverge quite a bit, as happened recently in what was likely a mistake.

The B shares were created by Buffett in 1996 to suppress an effort to put together exploitative unit trusts which would have added a layer of cost to take advantage of small investors. In 2010 the B shares were split a second time – 50 to 1 – producing the current 1 to 1500 ratio. Buffett did this second split at the time of Berkshire’s acquisition of Burlington Northern Santa Fe in order satisfy the needs of BNSF shareholders who wished to receive Berkshire shares rather than cash in the acquisition.

Yesterday on CNBC, Josh Brown, who is normally well-informed and sensible, expressed the view that a split of the A shares would do no harm and enable meme-type investors to […]

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