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Why I'm Not Buying Berkshire Hathaway

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I get it. We all love Warren Buffett. He's the financial world's favorite rich uncle. His company, Berkshire Hathaway (NYSE: BRK-B  ) is a mighty juggernaut that's seen its stock price soar nearly 500,000% since its genesis. It's made many millionaires, and it made him a billionaire many times over. But it's not going to make me rich. It might not even make me market-beating returns going forward.

I don't want to bash Buffett. I really like the guy, and would love to talk shop with him for a few hours. I just won't invest in his company, and here's why.

Invest like a rock star
Let's face it, Buffett isn't just one of the greatest living investors. He's also one of the greatest financial celebrities of the past century. The ascent to fame wasn't an overnight process, although many financial pros and savvy investors were aware of his talents long before the media caught on. With fame comes attention, and therein lies the rub. How easy is it to thrash the market when the whole market pays attention to your every move?

If your goal is to beat the Dow (INDEX: ^DJI  ) , Buffett's had your back in spite of the spotlight, at least since 2002. In the past decade, Berkshire's doubled the anemic growth of the index, which just happens to track several of Buffett's key holdings.

Blinded by the light
But what if you jumped in later? The closer you get to the present, the worse Berkshire does relative to the Dow, and the more Buffett starts popping up in pop culture. Over the past five years the index is down 1%, but Buffett is only up 8%. The post-recession bounce wasn't as high for Buffett as it was for nearly everyone else -- the Dow turned the tables on Berkshire after 2009 and has grown double the rate of Omaha's finest. The past year hasn't been kind either, as Berkshire is down 8% relative to the index. Maybe he was too busy guest-starring in The Office finale.

None of this accounts for reinvested dividends from individual Dow companies, which would skew the numbers even more to Buffett's detriment. And speaking of dividends...

The dividend free pass
I hear quite often that Berkshire doesn't need to pay dividends. The argument often runs along similar lines to those given by my colleague Morgan Housel, who says that the company invests more efficiently than its shareholders and should have free reign to do so. This worked very well as it grew explosively through the '60s, '70s, '80s, and '90s. But now that Berkshire's a lumbering conglomerate with a $190 billion market cap, there's not quite as much room to run as there used to be.

Buffett loves dividends from other companies, however, and has made much use of them to grow Berkshire's cash hoard. Coca-Cola (NYSE: KO  ) , one of his favorite holdings, paid out about $376 million to Berkshire last year, according to Buffett's most recent shareholder letter. He boasts that the annual Coke dividends are likely to become greater than Berkshire's initial cost basis over the next decade.

Not quite so efficient
That's great for Berkshire, but what about its shareholders? It turns out that holding some of Buffett's favorite companies and reinvesting the dividends would have done better than just holding Buffett's company over the past decade and having him do the investing for you.

Coke, American Express (NYSE: AXP  ) , and Wells Fargo (NYSE: WFC  ) were three of Berkshire's largest holdings 10 years ago. Reinvested dividends helped all three trounce Buffett since then -- without that boost, none would have beaten Berkshire's 59% return. I can't give Buffett a free pass when the proof is staring me right in the face.

Core businesses in danger
Berkshire still generates a substantial amount of revenue from its insurance businesses. As with most any insurance business, Berkshire does better if there aren't any major catastrophes. Note the "if" -- predicting such things is notoriously difficult. But recent research has shown an uptick in extreme weather damage. 1996 to 2005 was the second-worst decade for hurricane damages since the 1930s, and the worst ever for sheer number of billion-dollar-plus hurricane-related losses.

The years since have continued that trend. Hurricane Irene tipped 2011 into the record books as the 10th natural disaster to cause over a billion dollars in damage, edging out 2008's nine 10-figure-plus calamities. Berkshire's been very good at hedging insurance risk, but not even Buffett can stop an earthquake, unless he can somehow figure out how to fly around the Earth fast enough to turn back time.

The bounce-back argument
But the stock will bounce back, won't it? After all, its price-to-book ratio is about the lowest it's ever been. But in its peer group -- if you consider insurers its peers -- Berkshire isn't unique. A number of major insurers have suffered price-to-book compression over the past decade, many worse than Berkshire's.

In case you think I'm cherry-picking to make Berkshire look bad, only Progressive has a higher price-to-book ratio, at 2.14. It hasn't been a great decade for big banks either in price-to-book terms, but with such depressed prices, many of them look pretty attractive, and some have already grown more since 2012 started than Berkshire has since 2009.

Better opportunities elsewhere
If Berkshire had a dividend, I could see the appeal. If it was still booming, it'd be a great buy. But now, after decades of dominance, it looks like Buffett's reign as king of the market has come to an end. Thanks for all the memories, Warren, but it looks like I'm too late to ride your coattails to market-beating returns. You can see the bearish CAPScall I made on Berkshire at my CAPS player page. I plan to keep it for the long haul.

Just because Buffett's run is over doesn't mean you can't still find plenty of opportunities. The Motley Fool has just released a free report on 11 rock-solid dividend payers that can help secure your future. Take a look at these great picks for the long haul -- click here to reserve your free copy now.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Berkshire Hathaway, Coca-Cola, and Wells Fargo. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Coca-Cola and Berkshire Hathaway, as well as creating a write covered strangle position in American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2012, at 4:16 PM, tweenthelines wrote:

    Nobody cares what you don't do....and nobody cares if you fly fish.

  • Report this Comment On January 18, 2012, at 4:20 PM, knighttof3 wrote:

    You just made a convincing case why one should BUY BRK. It is cheaper than (or at least, run up less than) its holdings and P/B has compressed too. It differs from most other insurers in to crucial aspects: 1) It has large equity holdings while other insurers hold more in bonds. Thanks to the runup in bonds over this decade, investors know that their book values will come down as soon as interest rates head up. Not so much for equities. 2) More and more of BRK's income comes from subsidiaries and less from its investments in stocks and bonds; which means it should be valued more like a conglomerate and less like a financial company; and deserves a higher P/B, P/E, etc.

    Not to mention that the insurance market seems to be hardening again, and BRK has a rock-solid balance sheet.

  • Report this Comment On January 18, 2012, at 4:32 PM, KJHValue wrote:

    I agree they won't grow like in the past. And a dividend would be nice as well. But it's undervalued and should be a steady performer in the next few years.

  • Report this Comment On January 18, 2012, at 5:06 PM, Gregeph wrote:

    Berkshire has outperformed the S&P 500 in each of the ten most recent five-year periods by an average margin of just over 7%.

    The core business, insurance, is not in danger. Berkshire has arguably the best insurance business in the world, with several competitive advantages based in its scale, reputation, cost advantages, fortress balance sheet and ability to respond quickly.

    "If it was still booming"... the author provides no evidence to back up this claim. Berkshire's current normalized earnings are $17 billion annually pre-tax. This is on top of an equity portfolio valued at almost $70 billion comprising focused positions in some of the best businesses in the world.

    I am all for looking at information that disconfirms my investment ideas, but this article is IMHO short on facts to back up its argument.

    For more see my article "100 Ways to Beat the Market #20: Buy Berkshire Hathaway at 1.1x book value or less" at

  • Report this Comment On January 18, 2012, at 6:59 PM, knighttof3 wrote:

    BTW 9 of the " 11 rock-solid dividend payers " linked in the article are XOM, PEP, JNJ, PG, WMT, T, NYB, GHL and OMI. (Knowing the other 2 requires a paid subscription.)

    No argument there, you can buy BRK _and_ buy these stocks as well (maybe leave out the smaller names like NYB, GHL, OMI.) It doesn't have to be one or the other.

  • Report this Comment On January 18, 2012, at 7:14 PM, DoctorLewis4 wrote:

    Go buy Microsoft. I'll buy BRK-B. Let's see where we're at in two years. (I REALLY like my odds on this bet)

  • Report this Comment On January 19, 2012, at 3:40 AM, rbacher wrote:

    So, how large IS your BRK-B short position?

  • Report this Comment On January 19, 2012, at 9:20 AM, ouchtouch wrote:

    I made money with BRK but I don't own it anymore. Buffett has shown great ability to invest in an expanding economy but I have no confidence that he knows how to invest in a long collapse. For example, he is proud of the fact that he doesn't understand gold. (Hint -- when real interest rates are too low to compensate for the risk of holding a currency issued by a nation with incredibly high debts that it can never repay people tend to move money to gold.)

  • Report this Comment On January 19, 2012, at 10:57 AM, hheiserman wrote:

    Alex -

    You raise excellent points.

    But may I suggest adding another paragraph that details your intrinsic value estimate?

    With this information, we can debate whether BRK sells at a deep enough discount to fair value to create a compelling reward-risk score.

    Thanks for writing this article.

    Hewitt Heiserman

    P.S., WEB is profiled in the latest TIME. He drinks 60 ounces of Coke a day, and his household expenses are $150,000 a year, he estimates (excluding the plane).

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