Should I invest in Berkshire Hathaway?
What do Apple, Bank of America, Coca-Cola, General Motors and American Express have in common? Do you give up? Okay, here's the answer. Each of these firms share one major investor: Berkshire Hathaway.
The name may not ring a bell but it is one of the largest, if not the largest, financial conglomerate in the world. Of the 500 biggest public companies in the US (the S&P 500), it holds spot number 8, and spot number one among companies that are not big tech giants.
So what exactly does Berkshire Hathaway do and what is its history? More importantly, is it worth investing in today? Let's take a closer look.
From textile to financial conglomerate
Berkshire Hathaway was not always this huge, all-investing company. Its beginnings were actually much more modest, as the firm began its history in 1839 in the textile industry. By the mid-1950s, the company was one of the most successful textile companies in the United States.But by the end of the decade, the industry was falling apart, and Berkshire Hathaway went down with it.
How did this struggling company turn into one of the world's largest conglomerates? The answer lies in one name: Warren Buffett.
The businessman became interested in Berkshire Hathaway in 1962. He began by buying shares at a price of 7.5 dollars, then ended up acquiring the entire capital of the company in 1965 to take it in a new direction: that of insurance and investment.
As the years went by, Buffett via Berkshire Hathaway increased his investments in companies that he considered to be undervalued, acquiring several and then giving considerable autonomy to the managers of the subsidiaries. His bets were so successful people started calling him the Oracle of Omaha.
In this way, Warren Buffett acts as the paragon of value investing, and is its most famous representative. Value investors believe that the market overreacts to both good and bad news, resulting in share price movements that are not in line with a company's long-term fundamentals.
How Berkshire Hathaway makes money
But how exactly does Berkshire Hathaway make money? To find out, let's take a look at the company's latest earnings report, which looks back on 2021. The first thing you'll notice is that Berkshire Hathaway makes its money from two main sources. What it calls its operating income, which is the profit generated by the subsidiaries that the company owns, mainly in the insurance, energy and railway sectors. These have increased by 25% between 2020 and 2021, from 22 to 27.5 billion dollars.
But, most of Berkshire Hathaway's profits come from the investments the company makes in the financial markets. In 2021 (an exceptional year in terms of market gains), the company earned more than $61 billion from its investments, almost double the amount from the previous year.
Over the past two years, the company has earned an average of 70% of its profits from investments in other companies, either through the profit it makes on the sale of certain shares or the dividends it receives on those it owns. Since 2018, the company has also had to comply with new accounting standards that force it to report the value of its investments as gains or losses, making its annual results even more dependent on the performance of its investments.
But what makes Berkshire Hathaway special is the reputation of its CEO, Warren Buffett. One word, one thought from him can be enough to move a share price. This is because of the company's investment performance, which many investors try to copy and sometimes follow blindly. Since Warren Buffett took over the entire company in 1965, Berkshire Hathaway has beaten the S&P 500 37 times out of 56, that is 2 out of 3 times. On average, while the S&P 500 has risen by an average of 10.5% per year, the value of Berkshire Hathaway's investments has risen by 20.1% per year over the same period. A remarkable performance when you consider that 75% of investment funds underperform the S&P 500.
How is Berkshire Hathaway's share price evolving?
So how does this translate into the Berkshire Hathaway share price? Is it also doing better than the S&P 500?
The first thing to say about Berkshire Hathaway's share price is that it is expensive... very expensive. At the time of writing, one share of the company is worth $532,000 (remember, Warren Buffett paid $7.5 per share in 1962)!
There are cheaper options. Like Alphabet, Berkshire Hathaway offers several types of shares. The oldest, the A class - the one worth more than 500,000 dollars - and the B class which is worth around 350 dollars (which you can find in the Vivid catalogue). What is the difference between the two? Apart from the share price, it is minimal and both follow the same trajectory. Class B shares were issued in 1996 to allow more people to invest in the company. Today, each Class A ordinary share is roughly equivalent to 1,500 Class B ordinary shares.
If you had invested €1,000 in the company's class B shares 10 years ago, you would have made a fairly good deal, as you would now have €3,700. In comparison, the same amount invested in the US benchmark, the S&P 500, would have earned you €2,500 over the same period.
The stock has also better resisted the high volatility of the beginning of the year than the rest of the market. Since 1 January, the company's share price has risen by almost 20%, while the S&P 500 has struggled to regain its levels of the beginning of the year.
Does this performance mean that investing in Berkshire Hathaway is a good idea? In the end, the decision is yours and comes down to determining whether the company can continue to outperform the US markets in the future.
Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.