A lot of research goes into investing in stocks, especially as the stakes get higher. That's why very wealthy individuals and hedge funds are likely to devote significant resources, time, and research before allocating a large share of capital to one individual stock.
But in Berkshire Hathaway's (BRK.A -0.55%) (BRK.B -0.48%) annual letter to shareholders, CEO Warren Buffett noted that there are many individuals with more than $100 million in net assets and even billionaires who invest in Berkshire's stock without thoroughly perusing the company's financial statements.
While this seems like an odd or even foolish move, Buffett thinks he knows why these ultra-high-net-worth individuals buy Berkshire's stock pretty much blindly.
Image source: The Motley Fool.
Insider ownership
In his letter to shareholders, Buffett attributed the buying of Berkshire's stock without due diligence to the large insider ownership of Buffett and other Berkshire executives like Charlie Munger, the vice chairman of Berkshire's board of directors.
They simply know that Charlie and I -- along with our families and close friends -- continue to have very significant investments in Berkshire, and they trust us to treat their money as we do our own. And that is a promise we can make.
Buffett has clearly put his money where his mouth is. In Berkshire's 2022 proxy report, which shows how much stock Berkshire's senior management teams and board of directors own, Buffett owned 238,624 class A Berkshire shares or roughly 38.8% of those outstanding. The Oracle of Omaha also owns more than 2,400 class B shares. Additionally, both Buffett's daughter Susan Alice Buffett and his son Howard Buffett are on Berkshire's board of directors and also own class A and B shares of Berkshire.
Munger, who has always been Buffett's right-hand man and is now 98 years old, owns 0.7% of outstanding Berkshire class A shares, which is far less than Buffett but equates to a total value of more than $1.95 billion. That's the majority of Munger's estimated $2.2 billion net worth. (His net worth used to be much higher, but Munger has donated much of his wealth as he's gotten older.)
This idea of having skin in the game is nothing new, either. In Berkshire's 1999 owner's manual, Buffett wrote that Munger's family had more than 90% of its net worth tied up in Berkshire shares, while Buffett's family at the time had 99%.
As Buffett wrote in 1999:
"Charlie and I cannot promise you results. But we can guarantee that your financial fortunes will move in lockstep with ours for whatever period of time you elect to be our partner. We have no interest in large salaries or options or other means of gaining an 'edge' over you. We want to make money only when our partners do and in exactly the same proportion. Moreover, when I do something dumb, I want you to be able to derive some solace from the fact that my financial suffering is proportional to yours."
A great lesson for investors
Berkshire Hathaway might be one of the only companies in the world that billionaires can get away with more or less blindly investing in the stock. But the big takeaway here is that you should find stocks for which members of the company's management team and board of directors have significant skin in the game.
I would always advise doing a lot of research on a company before buying any stock, but management's financial interests being aligned with yours is a big green flag. While a member of management or a director might sell their company's stock for personal reasons, there is only one reason they would buy it, and that's because they think it has potential upside.
