Berkshire Hathaway (BRK.A 0.04%) (BRK.B -0.09%) has proven to be one of the most profitable investments in history. Since 1980, the shares have risen more than 2,000-fold! A $100 investment would now be worth about $250,000.
Now, with a market cap of $900 billion, most of Berkshire's biggest gains are likely behind it. But that hasn't stopped the stock from doubling the return of the S&P 500 during the past three years.
But what should investors be thinking right now? Is Berkshire stock a buy, sell, or hold?
Conventional wisdom doesn't apply to Berkshire
For decades, investors have expected Berkshire's returns to slow down. And they have. From 1980 to 1990, the shares increased 28 times in value. From 1990 to 2000, they rose about sixfold in value. From 2000 to 2010, they roughly doubled. And in the most recent decade, they roughly tripled in value.
In general, the pace of Berkshire's gains have slowed, but the shares continue to rise decade after decade, typically faster than most market indexes. That's quite a feat. After all, the larger an investment portfolio becomes, the more difficult it is to outperform the market. That's because, now armed with a $900 billion market cap, Berkshire's investing universe is relatively small. Even if it invested several billion dollars in a company whose stock price quadrupled in a single year, it wouldn't move the needle very much for Berkshire's mammoth portfolio.
"The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers," Buffett famously quipped in 1999. "But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."
The fact that Berkshire continues to beat the market has surprised many experts, but in reality, this performance makes a lot of sense. Buffett, arguably the best investor of all time, remains at the helm. He has also retained the help of other legendary investors, including Ted Weschler, Todd Combs, and the late Charlie Munger. Together, Buffett and his team still have plenty of investment options, even if they are relegated to larger companies. Right now, for example, Apple is Berkshire's largest holding, a stake worth roughly $153 billion. Apple itself, however, is worth more than $2.6 trillion. Berkshire could theoretically invest its entire portfolio several times over in Apple alone and still not be close to owning the entire business.
So yes, Berkshire's returns have slowed down. And yes, its investing universe is more limited than in the past. But the keys to the company's success -- a collection of legendary investors making long-term investments -- remains in place. Expect Berkshire to continue beating the market in the decades to come.
But is the stock a buy right now?
Just because Berkshire's portfolio is poised to perform well during the coming years doesn't necessarily make the stock a buy. After all, it's possible that Berkshire's stock is overpriced, meaning you'll overpay for its portfolio's performance, hurting your own investment returns.
Is Berkshire stock priced appropriately right now? Valuing the company is notoriously difficult. There is its publicly traded portfolio, which is fairly easy to value because there are publicly traded prices to reference. But most of Berkshire's value is tied up in its portfolio of privately held businesses -- everything from insurance underwriters to national railroads.
A simple way to assess Berkshire's current valuation is by looking at its price-to-book ratio. This essentially gauges how much the market is willing to pay for Berkshire's assets. Today, the shares trade at a price-to-book ratio of 1.6, just above its long-term average. Relatively speaking, Berkshire stock isn't a bargain versus previous years, but it's also not overly expensive.
That's especially true given that the company has repurchased tens of billions of dollars of its shares in recent years -- an act that, while value accretive for shareholders, actually decreases the company's book value, creating a disconnect between accounting value and true value.
Overall, is Berkshire stock still a buy after all these years? Absolutely. All the pieces remain in place for its continued success, and the valuation, though not a bargain, is still a fair price to pay for one of the market's highest-quality businesses.
