Independent Financial Advice

Much has been written about Warren Buffett.  Although he has the second largest net worth in the world, very little has been made public about Berkshire Hathaway, the publicly-traded investment vehicle which is the center of his financial empire. Over the past two decades, Berkshire Hathaway has consistently outperformed the S&P 500 Index by approximately three-to-one. Not only has the company never posted a negative return, it has achieved double-digit performance in all but four years since 1965!

Is their a secret behind Berkshire’s unusual success? How is it possible that a relatively obscure company can consistently outperform the top mutual funds by a wide margin? Here are 25 reasons to own Berkshire Hathaway.

Long-term shareholders have never lost money: The company has never reported an annual loss. Visit www.berkshirehathaway.com and study the first page of the annual report.

Almost no cost: The low cost leader Vanguard and its most popular S&P 500 Index Fund charges almost $200 million in management fees. Berkshire Hathaway charged only $6 million on corporate administration. (The headquarters are located in a 3,700 square foot office in Omaha, Nebraska with twelve employees. Mr. Buffett’s annual salary: $100,000.)

No dividend and no taxes: Unlike mutual funds, Berkshire pays taxes for its shareholders. The 30+ years of book value annual returns of 23% are after taxes. Instead of paying a dividend, which is taxed twice (at the corporate and individual level), the company reinvests all earnings.

Acts like a mutual fund: It combines the qualities of a stock with the benefits of a mutual fund. Like a mutual fund, Berkshire owns a diversified collection of publicly traded companies, researched, purchased and managed by Mr. Buffett. In addition, Berkshire holds a portfolio of wholly-owned, private businesses such as GEICO insurance and See’s Candy.

Chairman’s letter and annual report: It can be read online at www.berkshirehathaway.com. No other letter is more anticipated by the investment community. The report is readable, forthright, honest, thought-provoking and wise. (It should be required reading in every college finance and investment class.)

Buffett discount: Because it is thinly traded, has very high insider ownership and has a small stockholder group, it trades at a discount to its intrinsic value. Because Berkshire is not included in the Dow Jones Industrial Average or the S&P 500, no institutional owners need to own this stock.

Owner managed: There are very few public companies that have an owner/manager orientation. The Chairman and his family control nearly 40% of Berkshire. Owners are concerned about costs, staff, fees, salaries, taxes, long term performance, value, charity, longevity of the enterprise, capital allocation and employee motivation.

Stable portfolio: While the market has been busy in the last 10 years trading billions of shares per day, Mr. Buffett has made very few moves. Recently, positions were established in Walmart and Anheuser-Busch. The only major move before that was the purchase of McDonald’s in 1996. And prior to that the portfolio of marketable securities looks about the same for the last 15 years accept for the removal of Guiness and the addition of Gillette, Wells Fargo and American Express.

Business ownership and time: Ownership is a state of mind and does not require action. Mr. Buffett said “what we own is not for sale at any price.” Berkshire is about durable and sustainable businesses over time, positioning itself to take advantage of whatever opportunity comes its way over time.

International exposure: Berkshire provides its shareholders international exposure without the international risks. One example is Coca-Cola where Berkshire is the largest shareholder with 200 million shares. Coca-Cola sells one billion servings everyday worldwide, has been named the most recognizable international trademark and the most preferred soft drink in China (Population: 1.2 billion). 70% of Coca-Cola’s sales and profits are outside North America. In 2003, Berkshire made a sizable investment in the publicly-traded PetroChina. More recently, Berkshire announced their purchase of an 80% stake in the world’s second largest manufacturer of metalworking tools, privately held Iscar based in Israel.

Book value per share: Book value is assets minus liabilities and a very conservative way of evaluating a business. Berkshire reports to its owners each year, not on the market price, but on growth in book value per share. On average, book value has grown 23% annually since inception and every calendar year.

Reveals investment errors: Most annual reports provide complete detail about how wonderful management and the business have done or the optimistic outlook of future opportunities. At Berkshire, the annual report clearly details what mistakes have been made. It is shocking, yet refreshing, how quickly the errors are admitted out at Berkshire.

Buy one stock, get over 100 companies: Here is a recent list of the wide ranging businesses Berkshire Hathaway owns a significant stake in public companies.  

• American Express
• Anheuser-Busch
• Coca-Cola
• Johnson & Johnson
• Moody’s
• Proctor & Gamble
• Walmart
• Washington Post
• Wells Fargo

Wholly owned subsidiaries:

• Acme Building Brands
• Adalet
• Applied Underwriters
• Arbortech
• Ben Bridge Jeweler
• Benjamin Moore
• Borsheim’s Fine Jewelry
• Buffalo News
• Business Wire
• Campbell Hausfeld
• Carefree of Colorado
• Central States Indemnity
• Clayton Homes
• CORT Business Services
• Dexter Shoe Company
• Douglas/Quikut
• Executive Jet
• Fechheimer Brothers Company
• Flight Safety International
• France
• Fruit of the Loom
• Garan
• GEICO Direct Auto Insurance
• General & Cologne Re
• Halex
• Helzberg Diamonds
• H. H. Brown Shoe Company
• International Dairy Queen
• Johns Mansville
• Jordan’s Furniture
• Justin Brands
• Kansas Bankers Surety Company
• Kingston
• Kirby
• Lowell Shoe Company
• McLane Company
• Meriam Instrument
• MidAmerican Energy
• National Indemnity Company
• Nebraska Furniture Mart
• Northland
• Pampered Chef
• Precision Steel Warehouse, Inc.
• RC Willey Home Furnishings
• Russell
• Scott Laboratories
• Scottcare
• Scott Fetzer Companies
• See’s Candies
• Shaw Industries
• Stahl
• Star Furniture
• United States Liability
• Wesco Financial
• Western Enterprises
• World Book
• XTRA

Free use of money: Berkshire has a unique investment opportunity not available to many companies. Berkshire has over $40 billion in “float”, the insurance premiums taken in before claims are paid out. The importance of insurance is that it earns a 20% or higher return on equity on the business plus it provides free leverage to all its other businesses. Berkshire has perpetual capital at its disposal, it comes at a profit and they pay no interest expense. Berkshire is a property and casualty insurance company and an investment conglomerate powerhouse.

Rich balance sheet: With its AAA credit rating and shareholder’s equity thank ranks number one in the U.S. and number two in the world, Berkshire is built better than Fort Knox.

Berkshire post Buffett: Many believe, including Mr. Buffett, that Berkshire’s share price will fall upon the announcement of his retirement. The stock selections are cumulative in nature. They aren’t for sale at any price. More than Buffett, Berkshire is the sum of its operating managers not its marketable securities. His successor will have an easy decision with the current holdings. Keep them forever and focus on allocating new cash as the operating companies send it to Omaha and the insurance operations generate float.

Built for bear markets: Sitting comfortably with over $60 billion in cash, Berkshire is ready to deploy its resources on a prime list of bargains.

Acquirer of choice: Berkshire has more than enough cash and one man makes the decision in less than five minutes. Berkshire can afford to be patient; it will select only the best and will usually have first choice. A key advantage is that Berkshire relieves the seller of the burden of being a public company. No raising and allocating of capital, dealing with shareholders, analysts, the media, annual meetings or reports. Berkshire is a great “owner”…for all of the acquired businesses now operating as subsidiaries; it has never lost an operating manager to a competitor.

Deferred taxes: The average taxable personal account, professionally managed account and mutual fund lose 3% to taxes annually. A dollar paid to taxes is gone forever. Choose Berkshire and let the company pay taxes for you.

No earnings dilution: Berkshire doesn’t offer restricted stock as a form of employee compensation. There is no such thing as “diluted earnings.” Berkshire’s policy is all compensation paid to its employees, including its officers, be tax-deductible to the corporation. In any new purchase, Berkshire immediately replaces the stock option program with a cash equivalency form of compensation.

Concentration: Most investors underestimate the value of a few great investment ideas. Over 60 percent of Berkshire’s common stock investments are in just three stocks.

Undervalued stock: Berkshire is consistently undervalued. Some of this is by management’s own design while mostly it is misunderstood. Because of accounting rules, Berkshire carries its wholly owned subsidiaries at their original cost. Generally, accepted accounting principles do not allow a restatement no matter how much the business’s have grown. (As an example, See’s Candies generates profits in one year what Mr. Buffett paid for the entire company in the early 1970’s.) More reasons why Berkshire is undervalued:

• Under analyzed (the first analyst to follow the company was in 1999);
• The highest stock price;
• The lowest trading volume;
• Very high insider ownership;
• Only 3% annual shareholder turnover;
• Operating companies are hard to evaluate.

Capital allocation: The challenge for any successful business is to efficiently deploy its excess capital. Yet for the average business, this is one of the most obvious weaknesses. Berkshire has made a name for itself in business valuation and has demonstrated remarkable skill in this area. The primary strategy is to take excess capital from their operating businesses and invest in properly.

Creative tax free dividends: Berkshire doesn’t provide a traditional dividend; however, it is a proponent of stock repurchases. If the business cannot invest their earning to grow their business, Mr. Buffett suggests that they take the excess cash and buy back their own shares. This lowers the number of outstanding shares and raises the percentage ownership of each shareholder. A traditional dividend is not deductible to the corporation and is taxable to the shareholder as ordinary income which can be as high as 45%. By returning value by increasing the stock value, capital gains will be taxed at 15% and doesn’t need to be paid unless there is a sale.

Simplicity: It is simple to own one security that owns over 100 different companies plus a smaller percentage of widely respected and publicly traded companies. That which is simplest is easiest to maintain. Berkshire simplifies your taxes – there are none.

Adapted and posted with permission from Robert P. Miles, author of The World's Greatest Investment: 101 Reasons to Own Berkshire Hathaway.

To learn more, you may find it helpful to read our other articles about the traits of successful investors, how investor behavior is a key determinant to long term results or thinking outside the style box.  If you have specific questions about your current portfolio or retirement planning, please contact us for a complimentary consultation.  You can also learn of new articles if you Subscribe to Independent Financial Advice by Email