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