Why Berkshire Hathaway Is a Core Stock for Your Portfolio

When I say "Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) ," most readers will probably immediately think "Warren Buffett." And there's nothing wrong with that. After all, Buffett is the financial mastermind -- along with his good buddy Charlie Munger -- who built Berkshire from the ashes of a failing textile manufacturer.

But today, Warren Buffett is only one small part of why Berkshire Hathaway should be a core holding for your portfolio.

The business
If I were to describe Berkshire Hathaway as any one specific business, I'd have to call it an insurance company. That makes sense because insurance makes up the largest slice of Berkshire's overall business. The company owns the gecko-fronted insurer GEICO, as well as more specialized insurance operations including General Re, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group.

Of course, Berkshire is much more than just an insurer. It's also a railroad operator. And it's a chocolatier. It's also an energy utility, a paint company, an underwear manufacturer, a furniture seller, a modular-home builder, a fine jewelry seller, a boot maker, and a slinger of the delicious Orange Julius. And I could go on.

And we don't want to forget that it's also an asset management giant of sorts, with a massive stock portfolio that includes very sizable positions in companies like Coca-Cola (NYSE: KO  ) and Wells Fargo (NYSE: WFC  ) .

In the end, it's probably best to describe Berkshire Hathaway as a conglomerate. It doesn't actually try to do all of these things as one seamless, centrally managed company. Instead, it buys many businesses whole -- businesses like Burlington Northern Santa Fe, International Dairy Queen, Fruit of the Loom, and Benjamin Moore -- and allows them to largely run themselves.

Why it's a core holding
Many people may think that the primary reason to own Berkshire Hathaway is to benefit from the investing prowess of Warren Buffett. I'm not going to argue with that -- the man has proven himself quite brilliant in financial matters, and as long as he's running the company I think there's definite value to his decision making.

However, as you look over the section above, one thing that's impossible to miss is the diversity of Berkshire's empire. Yes, it's about insurance to a large extent, but there's so much more to the company than insurance. As a core holding, Berkshire gives you exposure to many different industries though many very high-quality companies. Based on just what I outlined above, you've got exposure to finance (insurance businesses, Wells Fargo stock), transportation (Burlington Northern), consumer staples (Coca-Cola), consumer discretionary (Dairy Queen, Fruit of the Loom, Benjamin Moore), and even tech (IBM).

That description may inspire you to think of it as a mutual fund, and that's not totally off base. But there are very important features that make Berkshire and its diversity much better than an actual mutual fund. For one, we'd have to note (again) that it's run by Warren Buffett -- not many mutual funds can boast a manager that's quite that talented.

Maybe even more importantly, while most mutual funds these days are so busy trying to feverishly beat their benchmark -- which, by the way, most don't end up doing -- that they're buying and selling stocks faster than you can say, "The fees are killing me!" At Berkshire, there's none of that. That's due to Buffett's temperament, as well as the nature of the company. When you own entire businesses like Berkshire does, it's simply not possible to buy and sell on a whim. Likewise, when you are the owner of nearly $14 billion of Coca-Cola stock or $11 billion of Wells Fargo, you simply can't decide one day that you want to dump it all posthaste.

In other words, even if Berkshire was no longer run by Buffett (more on that in a moment), the company would still almost assuredly be a long-term owner of these diversified business interests.

Risks to watch
The biggest headline risk on Berkshire is almost assuredly the mortality of Warren Buffett. As sad as it will be, one day Uncle Warren will move on to that great conglomerate in the sky. The worry, of course, is: What happens to Berkshire after Buffett is no longer there?

As I outlined above, to a large extent, I think Berkshire will be very much the same. Due to the way that Buffett has built the company, it is a hugely valuable enterprise that largely runs itself. That's the beauty of the decentralized management.

That said, even though Buffett is actively working on hand-picking bright folks to come in and fill his shoes, there's a chance that the next person -- or group of people -- to run Berkshire will not reinvest the company's cash flow as well as Buffett has. And that's definitely a risk to consider.

At the same time, from a stock-price perspective, when Buffett does step down -- or, more likely, passes on -- there is almost no doubt that the stock will be punished by the market. Some may consider this a risk, but others may see it as a potential future opportunity to buy more stock later at a cheaper price.

Buffett isn't the only risk to Berkshire. As much as I like its diversity, that diversity also means that, as a whole, the company is very sensitive to broad economic conditions. Additionally, some of Berkshire's insurance operations write policies for very large catastrophic risks. The company has a great manager that runs that side of the insurance business, but that should still be on an investor's radar.

The bottom line
There are a lot of very well-known, well-run companies that I would argue would make a great core holding. Berkshire's largest individual stock holding, Coca-Cola, for instance, would make that list. So Berkshire certainly isn't the only stock that I'd really pound the table for as far as calling it a "core holding."

But take all of the reasons for owning Berkshire that I've outlined above and combine them with this: On the basis of price-to-book value, the stock currently trades at a level that was basically unheard of before 2008. And that is why I'm especially excited about Berkshire right now -- it's not only in my personal portfolio, but it's also an outperform call in my Motley Fool CAPS portfolio.

The Motley Fool owns shares of Berkshire Hathaway, Coca-Cola, and International Business Machines. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Coca-Cola. 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.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (11) | 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 February 02, 2012, at 5:03 PM, sandidad1 wrote:

    Once I had great respect for Buffet, now I put him in the same category as George Soros. Buffet made his billions from capitalism, now he's trying to destroy capitalism and replace it with socialism. If Buffet thinks the wealthy should pay more taxes go ahead and be an example and stop your class warfare by making these silly bets with the Republicians in congress! Why didn't Buffet make the same bet with the Democrats in congress? Democrats are the "spend other peoples money party".

    I read one of Buffet's books years ago and I remember a quote he made to an interviewer when they ask him why didn't he give more to charity, this was before he made a big contribution to Bill Gates' foundation. In essence, Buffet said, "I can do more good for the public by investing the money myself than a charity can". So Buffet, why do you urge people to give more money to our inept government? It's like pouring money down a rat hole, Buffet knows that, so stop playing your stupid games with tax payers money. Play those games with your own money Buffet!!!!!!! It doesn't make any difference how much money Americans give to our government, they will find a way to spend/waste it.

    That's why I won't buy Berkshire Hathaway stock, I do have some principle, which obviously Buffet doesn't have.

    I'm an Independent and proud of it!!!!. Democrats and Republicians are ruining America!

    .

  • Report this Comment On February 02, 2012, at 5:17 PM, DoctorLewis4 wrote:

    Buffet is a patriot and a great American. Sorry others don't agree with his politics but to jump all over his character because of his patriotic right to offer an opinion is so FOX NEWS. I'm a proud Berkshire shareholder and even prouder of Warren Buffet the human being.

  • Report this Comment On February 02, 2012, at 6:17 PM, Marlowe70 wrote:

    While I love MF articles, as a relatively inexperienced investor, I find it confusing to read something like this when only days before a different fool was suggesting I could do better in this article. http://www.fool.com/investing/general/2012/01/18/why-im-not-...

  • Report this Comment On February 02, 2012, at 6:33 PM, TMFBiggles wrote:

    @ Marlowe70 -

    We all have our own opinion. I appreciate the freedom to differ from my fellow Fools, but I also appreciate the possibility of being proven wrong. Maybe I'll be right over the long run, and maybe Matt will be.

    I wouldn't say any one article should be the end of your research. Looking at multiple perspectives is much more valuable than reinforcing what you already know. It's up to you to parse what you've found and decide what to do with the information.

    Fool on,

    - Alex (author of the article you linked)

  • Report this Comment On February 02, 2012, at 8:04 PM, TMFKopp wrote:

    @Marlowe70

    For what it's worth, I think Alex (TMFBiggles) is crazy, wrong, and a communist to boot. :)

    Seriously though, he hit it on the head in the comment above. As the word "motley" suggests, we encourage everyone at The Fool to share their own views rather than spout some company-endorsed party line.

    I certainly understand how that can create confusion, but I also believe that, as Alex noted, it's important to take all sides of an investment into consideration. And whether we're talking Berkshire, Netflix, Procter & Gamble, or any of the thousands of other stocks out there, there will always be two sides (remember, it's a stock *market* so there's a seller for every buyer).

    I will also point out that both Alex and I have made ourselves accountable for our respective views. In my CAPS portfolio (http://caps.fool.com/player/TMFKopp.aspx) I've given Berkshire a thumbs up. In Alex's (http://caps.fool.com/player/tmfbiggles.aspx) he's given it a thumbs down.

    Matt

  • Report this Comment On February 02, 2012, at 8:12 PM, budlab wrote:

    You are right about the assortment of profitable businesses. They all have competitive advantages discussed in the new book MOATS. Here is a list of the 70 Businesses covered in the book.

    Acme Brick Company, Bud Labitan with Adam Ward, UNO-CBA.

    American Express Co. (AXP), Dr. Maulik Suthar, Gujarat, India.

    Applied Underwriters, Bud Labitan with Adam Ward, UNO-CBA.

    Ben Bridge Jeweler, Bud Labitan with Beryl Chavez Li, University of Manchester, UK.

    Benjamin Moore & Co., Bud Labitan with Mr. Jack Wang CPA, Lexico Advisory.

    Berkshire Hathaway Group, Bud Labitan with Brian Greising, MainStreet Advisors and and Rick Mayhew

    Berkshire Hathaway Homestate Companies, Bud Labitan with Beryl Chavez Li, University of Manchester, UK.

    BoatU.S., Bud Labitan with Peter Chen, Singapore.

    Borsheims Fine Jewelry, Bud Labitan with Tariq Khan, UNO-CBA.

    Buffalo News, Bud Labitan and Peter Stein

    Burlington Northern Santa Fe Corp. Bud Labitan with David Leoy.

    Business Wire, Bud Labitan with Larry Harmych.

    BYD, Bud Labitan with Kevin Walsh, UNO-CBA.

    Central States Indemnity Company, Bud Labitan with Azalia Khousnoutdinova, UNO-CBA,

    Clayton Homes, Bud Labitan with Erin Sestak, UNO-CBA.

    Coca Cola (KO) Bud Labitan with Sebastian Jung, UNO-CBA,

    ConocoPhillips (COP), Bud Labitan with Adam D. Studts, PE, UNO-CBA.

    CORT Business Services, Bud Labitan with Erin Sestak, UNO-CBA.

    Costco Wholesale (COST), Bud Labitan with Jubin Jacob, AUC-SOM.

    CTB Inc., Bud Labitan with Todd Sullivan.

    Fechheimer Brothers Company, Bud Labitan with Ben Albaitis.

    FlightSafety, Bud Labitan with Peter Stein

    Forest River, Bud Labitan with Richard Konrad, CFA, Value Architects Asset Management.

    Fruit of the Loom®, Dr. Maulik Suthar, Gujarat, India.

    Garan Incorporated, Bud Labitan with Dr. Edwin Fuentes

    Gateway Underwriters Agency, assigned Daniel Rudewicz, CFA of Furlong Financial, LLC.

    GEICO Auto Insurance Bud Labitan with Florian Beil, UNO-CBA,

    General Re, Bud Labitan with Raghu Dasari, UNO-CBA, and Theodor Tonca

    H.H. Brown Shoe Group, Bud Labitan with Mervyn H. Teo (Singapore).

    Helzberg Diamonds, Bud Labitan with Natalja Callahan, UNO-CBA.

    HomeServices of America, Bud Labitan with Sebastian Jung, UNO-CBA,

    IBM, Bud Labitan with Tim Bishop and Peter Stein

    International Dairy Queen, Inc., Bud Labitan with Tariq Khan, UNO-CBA.

    Iscar Metalworking Companies, Bud Labitan with Kevin Walsh, UNO-CBA.

    Johns Manville, Bud Labitan with Manpreet Singh Saran.

    Johnson & Johnson (JNJ), Beryl Chavez Li

    Jordan's Furniture, Bud Labitan with Zehao Sun.

    Justin Brands, Dr. Maulik Suthar, Gujarat, India.

    Kraft Foods (KFT), Bud Labitan with Andrea Tagart, UNO-CBA.

    Larson-Juhl, Bud Labitan with Tim Bishop

    Lubrizol, Bud Labitan with Scott Thompson, MBA.

    M&T Bank Corp (MTB), Bud Labitan with Cliff Orr, Kellogg-Northwestern University and Richard Konrad, CFA, Value Architects Asset Management

    Marmon Holdings, Inc., Bud Labitan with David Lau and Theodor Tonca

    McLane Company, Dr. Maulik Suthar, Gujarat, India.

    Medical Protective, Bud Labitan with Michael Murillo, KCUMB

    MidAmerican Energy Holdings Company, Bud Labitan with Dr. Maulik Suthar, Gujarat, India and Brian Bernardino, JD

    MiTek Inc. Bud Labitan with Mr. Jack Wang CPA, Lexico Advisory.

    Moody's (MCO), Bud Labitan with Raghu Dasari, UNO-CBA.

    National Indemnity Company, Bud Labitan with Jen Iwanski, UNO-CBA and Rick Mayhew

    Nebraska Furniture Mart, Bud Labitan with Julie Rosenbaugh, UNO-CBA, Theodor Tonca, and Shouryamoy Das

    NetJets®, Bud Labitan with Christian Labitan.

    PacifiCorp., Bud Labitan with Beryl Chavez Li, University of Manchester, UK.

    Precision Steel Warehouse, Inc., Bud Labitan with Adam D. Studts, PE, UNO-CBA and J.T. Loudermilk, MBA

    Procter & Gamble (PG), Bud Labitan with Beryl Chavez Li, University of Manchester, UK

    RC Willey Home Furnishings, Bud Labitan with Azalia Khousnoutdinova, UNO-CBA.

    Richline Group, Daniel Doyon, Purdue University.

    Scott Fetzer Companies, Cliff Orr, Kellogg-Northwestern and Hoang Quoc Anh, Vietnam

    See's Candies, Bud Labitan with Jen Iwanski, UNO-CBA.

    Shaw Industries, Bud Labitan with Daniel Doyon and Richard Konrad, CFA, Value Architects Asset Management

    Star Furniture, Bud Labitan with Pamela A. Quintero, MBA.

    The Pampered Chef® Bud Labitan with Julie Rosenbaugh, UNO-CBA.

    TTI, Inc., Bud Labitan with Peter Chen, Singapore.

    United States Liability Insurance Group, Bud Labitan with Stephen Chan, University of Manchester and Colin Farrier

    US Bancorp (USB), Bud Labitan with Richard Konrad, CFA, Value Architects Asset Management.

    USG Corp (USG), Bud Labitan with Richard Konrad, CFA, Value Architects Asset Management.

    Wal-Mart (WMT) with Florian Beil, UNO-CBA.

    Washington Post (WPO), Bud Labitan with Andrea Tagart, UNO-CBA and Richard Konrad, CFA, Value Architects Asset Management

    Wells Fargo (WFC), Bud Labitan with Natalja Callahan, UNO-CBA.

    Wesco Financial Corporation, Bud Labitan with Stephen Chan, University of Manchester, UK.

    XTRA Corporation, Bud Labitan

  • Report this Comment On February 02, 2012, at 9:48 PM, karlm1 wrote:

    It was nice to see Berkshire put a floor on the stock with the buyback announcement last year. Yes it will fall when Warren passes on but the stock itself wont stay depressed that long with an ongoing buyback policy. Announcing a regular dividend would also protect it from the downside. Without doing the math I am sure the dividend would be quite a large one if 30-50% of earnings were paid out to its shareholders.

  • Report this Comment On February 03, 2012, at 8:24 AM, TMFTomGardner wrote:

    But remember, historically, a sizable chunk of Berkshire's valuation has been based on the businesses that Buffett will buy in the future. So for BRK to beat the S&P, it will likely have to find someone good at buying businesses that a) outperform and b) are large enough to impact overall earnings.

    I don't go to sleep anxious about BRK. But I'm not as boldly confident as Kopp. Being great at full-company purchasing is not so easy as Buffett has made it look (cf Eddie Lampert).

    As for comments from the House Un-American Committee, who troll the Internet slamming Buffett, well, if Buffett should be thrown in the river for his views, give the world time enough, and you'll get tossed in, too. Buffett has a controversial view on taxes....and this makes him not a capitalist? (Incidentally, I don't entirely agree with his views).

  • Report this Comment On February 03, 2012, at 9:28 AM, dc10fun wrote:

    Did Bershire sell Sherwin Williams or do they own both SW and Ben Moore.

  • Report this Comment On February 03, 2012, at 12:09 PM, tweenthelines wrote:

    I believe I read on MF that one B a month cash comes to BRK. Has anyone on this post even bothered to calculate the accretion in book value. I'm sure Warren does as he goes about buying back shares at a phenomenal bargain.

  • Report this Comment On February 03, 2012, at 12:57 PM, TMFKopp wrote:

    @TMFTomG

    "But remember, historically, a sizable chunk of Berkshire's valuation has been based on the businesses that Buffett will buy in the future. So for BRK to beat the S&P, it will likely have to find someone good at buying businesses that a) outperform and b) are large enough to impact overall earnings."

    Good point. I think this is very true to a large extent and I think it'll be really hard to find somebody that fills those shoes. Or, frankly, for Buffett to do it himself even if he could live forever.

    As Tom points out, buying whole businesses is not all that easy.

    However, the big reason that I'm such a fan of Berkshire is that the overall model is so great. I have a ton of respect for Buffett, but I don't think there's any chance that he'd be the name that he is today if it weren't for Berkshire's model. The idea of owning these diversified, cash-generating businesses and basically telling them "You can use your cash to the extent that you can create attractive returns and the rest needs to be surrendered to corporate for re-deployment" is brilliant. That the cash held in float by the insurance operations can augment the investing firepower just takes it to the next level.

    So yeah, I think Buffett is pretty awesome, but at this point, I'm investing for the model (and the diversified businesses owned), not Uncle Warren.

    And, worth underscoring, if you're looking for the next five-bagger, I don't think it's here. I think Berkshire makes a fantastic *core* stock, particularly for conservative value curmudgeons (like me), but if you want really huge returns, I doubt you'll find them here.

    Matt

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1772105, ~/Articles/ArticleHandler.aspx, 10/21/2014 12:35:18 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement