Is Berkshire Hathaway Stock still worth owning?

[dirtbiker]

With Warren Buffett aging, we know he won't be head of BRK forever. The stock has only kept up with the market over the last decade, as opposed to crushing it as it had done for many years prior. We don't know who will take the reigns once he moves on. Is it worth still owning? Is there anything compelling to make me think it will beat the market in the future? Or should I sell what I have and buy more S&P 500 ETF?

 

[ESRwannabe]

With Warren Buffett aging, we know he won't be head of BRK forever. The stock has only kept up with the market over the last decade, as opposed to crushing it as it had done for many years prior. We don't know who will take the reigns once he moves on. Is it worth still owning? Is there anything compelling to make me think it will beat the market in the future? Or should I sell what I have and buy more S&P 500 ETF?

IMHO there are only two reasons to own it now.

(1) You want to go to one of their famous shareholder meetings before WB is dead.

(2) You want to hold a stock that will probably track the S&P 500 and will not pay out a dividend (for now).


In regards to (2) my guess is once WB and CM pass on the stock will eventually start paying out a dividend. I expect this will happen the first time they start to underperform. Then there will be pressure on them to start returning some of the cash to shareholders.

 

[dirtbiker]

IMHO there are only two reasons to own it now.

(1) You want to go to one of their famous shareholder meetings before WB is dead.

(2) You want to hold a stock that will probably track the S&P 500 and will not pay out a dividend (for now).


In regards to (2) my guess is once WB and CM pass on the stock will eventually start paying out a dividend. I expect this will happen the first time they start to underperform. Then there will be pressure on them to start returning some of the cash to shareholders.

It's not like they don't have a big pile of cash to return to shareholders... and speaking of the big pile of cash, WB had said back in April that they could buy back as much as $100 billion in stock. Thus far they've bought back less than $500 million. Now might not be the worst time for him to start the buy back process... Or maybe he's predicting a bigger market correction coming and holding on to cash for the occasion...

 

[Ducati52]

They already have two "heir apparents" - Greg Abel and Ajit Jain. Both are taking over some of the investment decisions (it's thought one or both are responsible for Berkshire's position in Apple, for instance.) Buffet has made it pretty clear one of the two will move into his role, with the other perhaps taking over Charlie's position.

I've owned Berkshire for more than 20 years, continued to add over the years and have never sold. You are correct -- it has essentially tracked the S&P 500 for the past ten years, and in some cases slightly underperformed. It's now so big and so diversified I think it's days of crushing the index are behind it. Plus, value investing in general has trailed the S&P 500, which is more and more driven by FAANG stocks and other tech names.

I do think the makeup of Berkshire's companies and holdings mean it will not fall as far as the S&P 500 will when this bull market inevitably comes to an end. Plus, Berkshire is sitting on $112 billion in cash, and when the bear does roar, history has shown Berkshire is exceptionally good at deploying that cash to buy up bargain stocks or entire companies. Plus, I love the way they manage to structure sweetheart deals like B of A a decade ago or the recent Occidental deal.

Will this record continue without Warren and Charlie? I would like to think their DNA is thinking is so ingrained in the genetic makeup of Berkshire that it will, but I guess we'll find out. Obviously you know how I'm betting.

 

[NW-Bound]

... it has essentially tracked the S&P 500 for the past ten years, and in some cases slightly underperformed. It's now so big and so diversified I think it's days of crushing the index are behind it. Plus, value investing in general has trailed the S&P 500, which is more and more driven by FAANG stocks and other tech names.

I do think the makeup of Berkshire's companies and holdings mean it will not fall as far as the S&P 500 will when this bull market inevitably comes to an end. Plus, Berkshire is sitting on $112 billion in cash, and when the bear does roar, history has shown Berkshire is exceptionally good at deploying that cash to buy up bargain stocks or entire companies. Plus, I love the way they manage to structure sweetheart deals like B of A a decade ago or the recent Occidental deal...

People often forget to give credit to a guy who can keep up with the S&P while holding a big chunk of cash. Much of the S&P recent growth is driven by megacap growth stocks. This cannot continue forever.

 

[bobandsherry]

Basically, as diversified as Berkshire is it essentially is the S&P.

 

[imoldernu]

Off Topic... but can't resist...

From Wikipedia:

Berkshire Hathaway traces its roots to a textile manufacturing company established by Oliver Chace in 1839 as the Valley Falls Company in Valley Falls, Rhode Island. Chace had previously worked for Samuel Slater, the founder of the first successful textile mill in America. Chace founded his first textile mill in 1806. In 1929, the Valley Falls Company merged with the Berkshire Cotton Manufacturing Company established in 1889, in Adams, Massachusetts. The combined company was known as Berkshire Fine Spinning Associates.[12]

My dad's first job was as an apprentice loomfixer in the Valley Falls Company... a two mile walk from his house in Pawtucket RI. (circa 1926)... On the other side of the family, my Grandmother was a Cluett... (Cluett Peabody) later Arrow shirts. (Unfortunately no $$$ trickled down.)

 

[KenZ71]

Buffett himself has said the average investor would be best served by a S&P 500 index fund.

 

[dirtbiker]

They already have two "heir apparents" - Greg Abel and Ajit Jain. Both are taking over some of the investment decisions (it's thought one or both are responsible for Berkshire's position in Apple, for instance.) Buffet has made it pretty clear one of the two will move into his role, with the other perhaps taking over Charlie's position.

I've owned Berkshire for more than 20 years, continued to add over the years and have never sold. You are correct -- it has essentially tracked the S&P 500 for the past ten years, and in some cases slightly underperformed. It's now so big and so diversified I think it's days of crushing the index are behind it. Plus, value investing in general has trailed the S&P 500, which is more and more driven by FAANG stocks and other tech names.

I do think the makeup of Berkshire's companies and holdings mean it will not fall as far as the S&P 500 will when this bull market inevitably comes to an end. Plus, Berkshire is sitting on $112 billion in cash, and when the bear does roar, history has shown Berkshire is exceptionally good at deploying that cash to buy up bargain stocks or entire companies. Plus, I love the way they manage to structure sweetheart deals like B of A a decade ago or the recent Occidental deal.

Will this record continue without Warren and Charlie? I would like to think their DNA is thinking is so ingrained in the genetic makeup of Berkshire that it will, but I guess we'll find out. Obviously you know how I'm betting.

I do hope their thinking is so ingrained that it continues... But I've always bought BH because of WB and to a lesser extent CM. They're extraordinary investors with brilliant financial minds. Obviously their successors that they're grooming are of similar ilk... But are they going to be as good? We'll see. All of my BH stock is in a taxable brokerage account, so selling means paying the tax man. I also don't own an extraordinary amount, so taxes wouldn't crush me or anything. At this point, I'll probably hold onto the stock, if for no other reason than their cash pile is worth 40% of their current market cap. There's a lot they can do with this when the market turns.

People often forget to give credit to a guy who can keep up with the S&P while holding a big chunk of cash. Much of the S&P recent growth is driven by megacap growth stocks. This cannot continue forever.

This is a very good point. That cash pile isn't making any money, but just sitting there waiting for the right opportunity.

 

[Ducati52]

This is a very good point. That cash pile isn't making any money, but just sitting there waiting for the right opportunity.

It actually is making money -- he has it invested in bonds and other cash-like vehicles. I don't believe Berkshire breaks it out separately, but I've seen estimates that they're making 2-3% on the money.

BTW, Berkshire's cash on hand grew from $112 billion at the end of Q1 to $122 billion at the end of Q2. Warren said at this year's Berkshire investor meeting that their cash pile grows $100 million each and every business day!

 

[OldShooter]

... Is there anything compelling to make me think it will beat the market in the future? Or should I sell what I have and buy more S&P 500 ETF?

IMO this is a question something like: "Should I buy a plum or some grapes?" A choice between quite different things.

Harry Markowitz taught us the value of diversification and weakly or uncorrelated assets, the objective being to diversify away individual stocks risk leaving only market risk.

The alternative is a deliberately non-diversified portfolio where the investor holds a small number of stocks that he expects will be winners. The statisticians can argue about what "small" is, but the minimum number for diversification is often said to be 60 or more or even 100 or more stocks. IOW not practical for an individual investor.

So .. if your BRK is a small piece (<2%?) of a well diversified portfolio, then the decision is financially unimportant. You are diversified. If BRK is a large enough percentage that a home run would show in your total portfolio value, you are taking the non-diversified track.

One video that I really enjoy is Dr. Markowitz' advice to individual investors: https://youtu.be/TbMjIn1p-i0

 

[dirtbiker]

I find it impractical for an individual investor to own such large numbers of individual stocks too. Why not invest in an ETF or low cost mutual fund if you're going that route?

The BRK is a large piece of a non-diversified brokerage account. However, in my wife and I's 401Ks, I can't buy individual stocks, so instead we invest in ETFs, so it's a small piece of a well-diversified portfolio overall. But, my few individual stocks I own I spend a lot of time researching, both before buying, and deciding whether or not to keep them, even if they're small pieces of the overall picture. The beauty of ETFs is that I don't have to do any research to invest in, so I only have to spend time researching my individual stock choices in my brokerage account.

 

[OldShooter]

I find it impractical for an individual investor to own such large numbers of individual stocks too. Why not invest in an ETF or low cost mutual fund if you're going that route?

Of course. That's what I intended to imply when I used the phrase "not practical." We agree.

The BRK is a large piece of a non-diversified brokerage account. However, in my wife and I's 401Ks, I can't buy individual stocks, so instead we invest in ETFs, so it's a small piece of a well-diversified portfolio overall. But, my few individual stocks I own I spend a lot of time researching, both before buying, and deciding whether or not to keep them, even if they're small pieces of the overall picture. The beauty of ETFs is that I don't have to do any research to invest in, so I only have to spend time researching my individual stock choices in my brokerage account.

Nothing wrong with any of that. It seems that lots of people segregate a small portion of their otherwise diversified portfolios and use that portion for playing around with individual stocks. You can have fun but the money you make or lose will not have a material effect on the total portfolio. I think Markowitz would approve.

So ... you have answered your own question. You do not want to sell the BRK and buy an index fund. No fun there. Whether you want to sell BRK and buy some other individual stock is maybe the real question for you.

 

[dirtbiker]

Of course. That's what I intended to imply when I used the phrase "not practical." We agree.

Nothing wrong with any of that. It seems that lots of people segregate a small portion of their otherwise diversified portfolios and use that portion for playing around with individual stocks. You can have fun but the money you make or lose will not have a material effect on the total portfolio. I think Markowitz would approve.

So ... you have answered your own question. You do not want to sell the BRK and buy an index fund. No fun there. Whether you want to sell BRK and buy some other individual stock is maybe the real question for you.

Well, when I asked the question should I sell and buy the S&P 500 ETF, I guess what I meant was is there a reasonable chance of BRK beating the S&P? Not that I'd necessarily buy the EFT with that money, if that makes sense.

 

[NW-Bound]

Only 3% of my equity AA is in BRK. I hold it as a value-tilt position, and do not pay much attention to it. I spend much more time watching my growth stocks.

PS. P/E ratio of BRK is 17, while that of S&P is 21.