Berkshire Hathaway - An Ideal Investment

In my opinion, Berkshire Hathaway is about as close as you get to an ideal investment. It might not be exciting but an investment need not be exciting!

What appeals to me about Berkshire Hathaway is diversification, excellent management, and a reasonable investment return in exchange for minimal risk and cost.

Factors to Consider When Investing

Multiple factors to consider when investing include:

  • goals and objectives;
  • age and life expectancy;
  • degree of investment knowledge;
  • risk tolerance; and
  • current personal financial situation.

Obviously, one investment does not fit all. Some 'investments' people disclose on social media, however, are not for the faint of heart. I have seen everything from day trading, higher risk option trading strategies, foreign currencies, meme stocks, cryptocurrencies, and investments with abnormally high yields.

Some investors experience success with such investments but I strongly suspect a far greater number of investors lose money by following these strategies.

In addition to the risk aspect of these investments is the cost factor.

Some investors, for example, think day trading through a 'no fee' trading platform means there are no costs. These trading platforms, however, need to make money. The activities that go on 'behind the scene' are 'hidden costs'.

Keep It Simple

Investing can be daunting. However, it does not have to be this way.

I am helping a couple of young investors create investment portfolios. They have limited investment knowledge and spending time identifying appropriate investments is not their priority. As a result, we are keeping things simple.

Within their self-directed taxable and non-taxable investment accounts, for example, we restrict investments to shares in high-quality companies. In fact, additional shares in Berkshire Hathaway (BRK-a and BRK-b) were acquired today.

Berkshire Hathaway - An Ideal Investment - Business Overview

If you are unfamiliar or are vaguely familiar with BRK, I recommend reading the business description section of the company's FY2020 10-K.

BRK is a holding company that owns subsidiaries engaged in a large number of diverse business activities. The most important of these are primary and reinsurance businesses, a freight rail transportation business (BNSF Railway), and a group of utility and energy generation and distribution businesses. It also owns and operates numerous other businesses engaged in a variety of activities.

Class A and B Shares

BRK's Class A and B shares both provide access to this conglomerate. They, however, have important differences with the most noticeable difference being that Class A shares trade at ~$426,000/share and the Class B shares trade at ~$284/share on June 14, 2021.

Class B shares were introduced in 1996 in response to the demand for a lower-priced means by way investors could participate in the success of BRK; Class A shares were trading at ~$30,000 at the time. This new class of shares provided the ability for investors to invest in BRK for 1/30th the price of a Class A share.  A 50-to-1 stock split in 2010, however, increased this ratio to 1/1,500th.

Each Class A common share is entitled to one vote per share and one Class B common stock possesses dividend and distribution rights equal to one-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class B common share possesses voting rights equivalent to one-ten-thousandth (1/10,000) of the voting rights of a Class A share.

A Class A common stock is convertible, at the option of the holder, into 1,500 shares of Class B common stock. Class B common stock is not convertible into Class A common stock.

When the Class B shares were introduced, Warren Buffett, BRK's Chairman and CEO, explained in his 1996 annual letter to shareholders:

'As I have told you before, we made this sale in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and definitely nonrepeatable, record to entice naive small investors and would have charged these innocents high fees and commissions....

...Our issuance of the B shares not only arrested the sale of the trusts, but provided a low-cost way for people to invest in Berkshire if they still wished to after hearing the warnings we issued. To blunt the enthusiasm that brokers normally have for pushing new issues - because that's where the money is - we arranged for our offering to carry a commission of only 1.5%, the lowest payoff that we have ever seen in a common stock underwriting. Additionally, we made the amount of the offering open-ended, thereby repelling the typical IPO buyer who looks for a short-term price spurt arising from a combination of hype and scarcity.

Overall, we tried to make sure that the B stock would be purchased only by investors with a long-term perspective.'

Diversification

Investors seeking diversification get this from an investment in BRK.

Pages 125 - 130 of 136 in the FY2020 10-K reflect BRK's subsidiaries. In addition to all the companies in multiple industries and geographic locations, BRK has exposure to several publicly traded companies. The most current 13F-HR found at The Securities and Exchange Commission EDGAR search engine lists these publicly traded companies. This link is for the 13F-HR May 17, 2021 filing date and March 31, 2021 reporting date.

Risk

In my The Importance Of Margin Of Safety post, I state that every investment carries a degree of risk. It is up to the investor to determine if the potential investment return outweighs the potential risks.

BRK is a conglomerate overseen by a small group of highly sophisticated investors who properly assess risk/reward!

BRK's unsecured long-term debt credit ratings are a testament to exceptional risk management.

  • Moody's: assigns an Aa2 rating.
  • S&P Global assigns an AA rating.
  • Fitch assigns an AA- rating; this rating is one notch lower than that assigned by Moody's and S&P.

All 3 ratings are high-grade investment-grade credit ratings and define BRK as having a VERY STRONG capacity to meet its financial commitments. It differs from the highest-rated obligors (AAA) only to a small degree.

Berkshire Hathaway - An Ideal Investment - Dividends and Share Repurchases

Dividend and Dividend Yield

BRK does not distribute a dividend.

Share Repurchases

For many years, BRK never repurchased shares. In recent years, however, attractive investment opportunities have become increasingly difficult to identify. Management has, therefore, deployed surplus funds toward the repurchase of BRK shares; BRK repurchased $24.7B, $4.85B, and $1.35B of its shares in FY2020 - 2018.

Berkshire Hathaway - An Ideal Investment - Valuation

Quite frankly, I pay very little attention to BRK's valuation for reasons explained in Warren Buffett's FY2020 Letter to Shareholders (starts on page 5 of 148).

Berkshire Hathaway - An Ideal Investment - Final Thoughts

I view Berkshire Hathaway as an ideal investment in that it is almost like a broad-based exchange-traded fund (ETFs)...but better. BRK's excellent management oversees great companies in which ETFs can not invest; these great companies are privately held by BRK. On the other hand, BRK has the flexibility to invest in publicly traded companies in which ETFs invest.

When it comes to investment-related expenses, ETFs and mutual funds have ongoing fees. There are no such fees with a BRK investment.

On the subject of risk, BRK is far less risky than the junk in which some people choose to invest.

BRK is so big (~$648B market cap) that it is exceedingly difficult to generate the return achievable from an investment in a much smaller company. Looking at BRK's return over a 10-year timeframe, however, we see that it is comparable to the S&P500.

I am optimistic about BRK's ability to continue to reward long-term shareholders. The plan is to periodically acquire additional BRK shares for myself and for the two young investors with whom I am working to create long-term wealth.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long BRK-b.

Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.