Berkshire Hathaway is a very famous company listed on the New York Stock Exchange.
For one, it is run by the world’s greatest investors Messrs Warren Buffet and Charlie Munger.
Berkshire's growth in book value has from the time Buffet took over in 1965, grown by 18.7% compounded annually.
Berkshire share price has not done badly itself.
If you had bought $1 worth of Berkshire share in 1965, the price of that $1 stake would be worth $19 602.59 as at 31 December 2018.
The S&P 500 (USA equivalent to the JSE all share index) has itself turned a $1 investment made in 1965 to $135.19 as at 31 December 2018.
A business can be compared to a tree in that it produces fruit (profits).
The attractiveness of a tree is enhanced by its resistance to diseases, ability to survive alien species, regularity of fruits ,proximity to water and so on.
The ratio between the fruits produced and the price of the tree is the earnings multiple.
As the multiple between the price of the tree and the amount of fruit it can produce on average increases:
The more expensive the tree becomes.
It is the bread and butter of Berkshire Hathaway to buy great businesses when they are undervalued (selling at low price earnings multiples).
Throughout the years Berkshire has taken up stakes in GEICO, National indemnity, Apple, Amazon, Coca Cola among others.
A great foundation
Buffet started his investing career by studying under and later working for Benjamin Graham, the father of value investing, at the Graham-Newman Partnership.
At the Graham-Newman Partnership the 24 year old Warren worked daily on establishing the value of companies, the assets they held and the earnings they could generate and comparing this value to their market price.
So what is the Berkshire secret for successful investing?
Security analysis by David Dodd and Ben Graham reveals the following:
The Classical Formula for “Beating the Stock Market.” We have here the long-accepted and classical formula for “beating the stock market.”
Obviously it requires strength of character in order to think and to act in opposite fashion from the crowd and also patience to wait for opportunities that may be spaced years apart.
Patience and acting on your own convictions and not what the market is saying.
Even if means waiting years...
Berkshire has had a strong management in place that sticks to its principles and does not get swayed by trends has helped.
Management has mastered the art of being greedy when others are fearful, and fearful when others are greedy.
In 2000 when everyone was mad about technology companies,
The management at Berkshire went away and purchased brick-making companies, paint makers, carpet makers, furniture renting companies,
hardly fashionable items on the stock market at the time.
An investor's worst enemy is himself.
Greed often leads to less sensible behavior and taking unprecedented risks.
Berkshire’s Management has over the years managed to control its urges to throw money at exciting new industries and what "the experts" frequently recommend to be the companies of tomorrow.
The company has come into criticism of late.
As at 30 September 2019 Berkshire Hathaway had about $124 billion in cash and short term US treasury bills.
Wall Street is struggling to understand why so much cash is kept on hand and not utilized.
The same Wall street that will happily endorse AMD stock when it is trading at an earnings multiple of 190!
There is discontent among some Berkshire shareholders who feel that the company should have generated more returns.
David Rolfe, through the RiverPark/Wedgewood Fund has sold 48 000 shares of its Berkshire B class of shares, amounting to about $10 million.
Rolfe has highlighted dissatisfaction with some of Berkshire Hathaway’s investments in the past 10 years.
Namely IBM and Kraft Heinz, which to date have not turned-out well.
Berkshire Hathaway shares have over the past 10 years slightly lagged behind the S&P 500. In that time, Berkshire’s Class A stock is up 323% while the S&P has gained 334%.
The insurance businesses have been building up a cash pile which the company has been unable to reinvest.
Warren Buffet has his 2018 letter to shareholders said that he wants to make a big acquisition.
There is just one problem: Prices are too high.
The Dow jones industrial average and S&P500 are at all-time highs.
At a time when a lot of people are looking at the internet giants and market capitalisations have breached a trillion dollars for Amazon and Microsoft;
Berkshire continues to stick to its principles of buying assets when they are undervalued.
So what next for Berkshire Hathaway?
Apart from Berkshire continuing to buy undervalued companies and Buffet living for another 90 years.
Buffett gives us a clue in his 2002 letter to Berkshire Hathaway’s shareholders:
"The aversion to equities that Charlie and I exhibit today is far from congenital.
We love owning common stocks – if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translate to 6½-7% after corporate tax), we will sit on the side-lines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.
When the time comes that prices get depressed again, when everyone is selling because Godzilla is back in town and bigger than ever, one company will have a $120 billion war chest gleefully waiting to buy.