When Warren Buffett took over as the majority owner of a small Massachusetts-based textile company called Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) in 1964, it was trading at about $11.40 per share. Almost 60 years later, the conglomerate is one of the 10 largest publicly traded companies in the world, with a market cap of about $769 billion. Its Class A shares are now trading at over $534,000 per share, while its Class B shares are a more reasonable $350 per share.
Buffett will turn 93 on Aug. 30, and he seems to be still going strong as chairman and CEO of Berkshire Hathaway. Can investors still count on him -- and his team -- to deliver now and into the next generation?
Berkshire maintains a huge legacy
This massive conglomerate has three major parts to its business. First, it is a holding company for a portfolio of some 65 subsidiaries, most of which it wholly owns, but a few in which it is a majority stakeholder. Some of the more well-known are Dairy Queen, Jordan's Furniture, Benjamin Moore, and Duracell. Second, it owns a number of insurance companies including GEICO and Berkshire Hathaway Specialty Insurance.
For the third part, it takes the float from its insurance businesses and invests that in a portfolio that currently includes around 50 stocks and is worth about $380 billion. Apple is the largest position, accounting for about 46% of the portfolio's value, followed by Bank of America at 9% and American Express at 7%.
That model enabled Berkshire Hathaway to be one of the steadiest, most consistent stocks on the market. Since May 1996, when the conglomerate debuted its Class B shares, the stock has averaged a 10.4% annualized return as of July 20. The S&P 500, by comparison, has had a total annualized return of about 9.5%.
Data by YCharts.
But when you look beyond the return, you see a business that is built to perform well in various market conditions. Specifically, it tends to perform well when the market is falling, as the steady results from its insurance businesses and its diverse array of subsidiaries typically offset the share price losses in the stock portfolio. For example, last year, Berkshire Hathaway finished the year up 3%, while the S&P 500 was down 19% and the Nasdaq Composite index was off 32%. In the last 10 years, Berkshire Hathaway stock has had just one negative year -- 2015, when it fell 12%.
Should you buy Berkshire stock?
The big question for long-term investors relates to whether Berkshire Hathaway thrive when the business is handed over to the next generation of leaders. Buffett will be 93 in August, and Vice-Chairman Charlie Munger, who has been his right-hand man for decades, will be 100 on Jan. 1. While Buffett has not indicated when he will step down, a succession plan has been in place for years. Longtime Vice-Chairman Greg Abel will take over as CEO, and Ajit Jain, another current vice-chairman who now runs the insurance units, is slated to be his right-hand man.
These were not decisions that Buffett has taken lightly, and he has said that he has complete confidence in the next generation of leaders to maintain Berkshire Hathaway's culture and execute on his strategic vision. I don't doubt that, and while there could be some market volatility in the early days of the transition, just due to investor uncertainty, the company shouldn't miss a beat under the new leaders. Then again, Buffett is only 93 -- he could go until he's 100 for all we know.
Buying shares of Berkshire Hathaway, with its diversified holdings and investments, is kind of like putting money into an exchange-traded fund or mutual fund that's managed by one of the world's greatest investors.
On top of that, Buffett has been hoarding cash. The conglomerate now has some $131 billion on the sidelines, and you can bet he and his team are carefully looking for the best way to put that to use. It should definitely be on your radar as a potential buy.
