Say it with me, folks.
It's a key concept and important wealth-protecting strategy, particularly for older investors. And it should be at the forefront of your investment allocation decisions.
But it can also help you choose the stocks that are most appropriate for your portfolio. Businesses with multiple sources of revenue can better withstand economic downturns, and therefore can help you protect and grow your wealth.
Diverse revenue streams
Berkshire Hathaway is a massive, $460 billion conglomerate with more than 60 subsidiaries. Its operations span across many different industries, including insurance, railroads, utilities, retail, and manufacturing businesses, among others. They include respected, well-known companies such as GEICO, BNSF Railway, MidAmerican Energy, Dairy Queen, and Precision Castparts. This broadly diversified collection of high-quality businesses helps to reduce Berkshire's risk profile, by limiting its exposure to a downturn in any one industry or profit source.
In addition to its operating subsidiaries, Berkshire owns an enormous portfolio of public stocks, worth more than $190 billion. Like the businesses Berkshire owns outright, this stock portfolio is comprised of companies with strong competitive advantages. This is to be expected, as it -- like Berkshire itself -- was built largely by legendary investor Warren Buffett, who has long espoused the importance of economic moats. Many of these stocks pay dividends, generating additional income for Berkshire. And Warren Buffett's unrivaled prowess in picking winners has helped to produce tens of billions in capital gains for Berkshire over the past half-century.
Together, Berkshire Hathaway's operating subsidiaries and investment portfolio have helped the company produce market-crushing gains for shareholders through all manner of market environments. In fact, since Buffett took the helm in 1965, Berkshire's stock has delivered annualized returns of 20.9% to investors, compared to 9.9% for the S&P 500.
A fortress-like balance sheet
The profits from Berkshire's operating subsidiaries and income from its investments constantly accumulate on its rock-solid balance sheet. At the end of the first quarter, the company's cash reserves totaled more than $108 billion. Buffett likes to keep at least $20 billion in reserve to cover any insurance-related losses. That leaves more than $80 billion that can be deployed in additional value-creating acquisitions and public stock purchases.
An all-weather business
When Buffett and his lieutenants identify attractive new investment opportunities, they can act quickly and decisively. This makes Berkshire a prime partner for businesses that need to raise cash quickly, such as during periods of economic distress. For example, Berkshire made a fortune by acquiring a large stake in Bank of America during the financial crisis. Buffett invested $5 billion at the time, and Berkshire's stake in the bank is now worth about $20 billion. By having the cash and temperament to act when others could not, Buffett created $15 billion in wealth for Berkshire and its shareholders.
Its Bank of America investment is just one example of how Berkshire tends to benefit when the economy suffers and markets plummet. That's when Buffett historically finds more attractively priced opportunities to acquire solid businesses either in whole or in part, thereby increasing Berkshire's earnings power and intrinsic value when the market eventually recovers. That's why, long-term Berkshire shareholders tend to look at market sell-offs with anticipation, rather than trepidation.
Built to win over the long term
The major risk for investors lies in Buffett's advanced age. At 87 years old, there may soon come a time when he is no longer able or willing to serve as Berkshire's chairman and CEO. Yet while no one could ever truly replace Buffett, he has made succession planning a point of emphasis in recent years.
Berkshire executives Ajit Jain and Greg Abel are widely considered to be strong candidates to succeed Buffett as CEO. Additionally, Buffett's handpicked investing lieutenants Ted Weschler and Todd Combs are already managing about $25 billion of Berkshire's capital, with outstanding results to date. Investors who buy shares today can, therefore, be confident that Berkshire will be in good hands even after Buffett eventually steps down.
Strong returns without the risk
All told, Berkshire Hathaway is one of the rare investments that can deliver market-beating results with a relatively low risk profile. Moreover, its diverse cash flow streams, superior financial fortitude, and ability to create value for its shareholders in nearly all market environments makes Berkshire the type of stock that can fit well in a 70-year-old investor's diversified portfolio. And with the company's solid succession plan in place, investors should continue to enjoy excellent risk-adjusted returns well into the future. Best of all, shares can currently be had for only about 1.35 times book value -- not far from the price at which Buffett has said he would be "aggressive" in repurchasing Berkshire's stock. As such, today is an excellent time to consider initiating -- or adding to -- a position in this incredible business.