1. Highly diversified growth
Berkshire has gone from a struggling New England textile mill that Warren Buffett's investment partnership acquired in 1965 to a $530 billion market cap diversified holdings empire with subsidiaries in insurance, energy, manufacturing, service, retail, and even a railroad. Even just a couple of decades ago, Berkshire owned relatively small wholly owned subsidiary companies like See's Candies, Dairy Queen, Borsheim's Fine Jewelry, Nebraska Furniture Mart, and Netjets. But as its insurance subsidiaries generated premiums -- known as insurance float -- and Buffett put it to work by acquiring larger companies and more publicly traded stocks, the value of the company snowballed. That is the power of compounding.
As that snowball has rolled down the hill, it has grown and grown. That's allowed Berkshire to acquire ever-larger companies. Over the past decade, Berkshire acquired former public companies Burlington Northern Santa Fe, Lubrizol, and Precision Castparts. Those three acquisitions alone cost the company about $75 billion. Additionally, Berkshire has bought stakes in publicly traded companies, including the purchase of 251 million shares of Apple over the last four years for about $35 billion. Those shares are now worth almost $76 billion, making Apple the company's single largest public stock holding and one of the most valuable pieces of the overall company. Given Buffett's disciplined investment approach of buying high-quality, growing companies for keeps, it is almost assured that Berkshire's wholly owned subsidiaries and its interests in publicly traded companies, collectively, will continue to grow in value over the long term.
2. Financial strength plus fantastic optionality
One enormous advantage of owning Berkshire is having Warren Buffett working for you. He gets up each day, buys his McDonald's breakfast on his way to work, and is constantly searching for large acquisitions that he can make for Berkshire. The company has been stockpiling obscene amounts of cash over the last decade as a result of the company's "high class" problem of generating more cash than it has been able to put to good use. At the end of 2008, Berkshire had about $26 billion of cash on the books. At the end of last year, it had an eye-popping $128 billion.
That war chest of cash gives Berkshire tremendous financial strength, but Buffett would love nothing more than to invest the majority of it in one or more large acquisitions. He's had trouble doing so lately because whole companies that he would like to acquire have not been available at prices he's found attractive. Instead, he's been finding more opportunities to buy pieces of companies at attractive prices in the stock market. The value of the equity securities Berkshire owns has gone from $49 billion at year-end 2008 to $248 billion at the end of last year. But that hasn't been enough to prevent Berkshire's mountain of cash from continuing to grow. It is only a matter of time before Buffett deploys more of that cash pile into whole businesses, more publicly traded stocks, or Berkshire's own shares. Doing any of those things would contribute to faster growth of per-share value than hoarding cash.
3. Attractive price
During the market's novel coronavirus outbreak panic last Friday, Berkshire fell to as low as $200 per Class B share. That price is equivalent to about 1.1 times the company's book value. While book value is an imperfect valuation tool, book value vastly understates Berkshire's business value. For example, many of Berkshire's wholly owned companies are valued on the books at their historical cost, which is usually far below their current values.
While valuing Berkshire or any company is an imprecise science, it is clear that Buffett thinks Berkshire is significantly undervalued. When the company's board first authorized the company to repurchase its own shares, it announced it would only do so at 1.2 times book value or less, a valuation level that Buffett has said significantly undervalues the company. Then in 2018, Berkshire announced it was doing away with that parameter and would instead consider repurchases any time Buffett and Charlie Munger, Berkshire's Vice Chairman, believe "the repurchase price is below Berkshire's intrinsic value, conservatively determined."
In other words, Berkshire can repurchase shares at prices higher than 1.2 times book value because even higher prices could still be below their estimate of fair value. A more reasonable fair value appraisal seems closer to 1.6 times book value. In that context, last Friday's market swoon, which sent Berkshire spiraling to as low as 1.1 times book value, provided too good of an opportunity to pass up. Stock investors should take notice.