History suggests that investors would be making a wise choice by buying Berkshire Hathaway (BRK.A -0.26%) (BRK.B -0.41%). But that's only true if you buy it and hold it for a long period of time. And that can only happen if you understand what you have purchased and are willing to stick with the investment through good markets and bad. Like any investment, Berkshire Hathaway isn't going to be the best choice for every investor.
Here are some of the reasons why you might not want to own the stock.
Berkshire Hathaway has an incredible track record
Before getting into the negatives, it is important to talk about one very notable positive. Over the long term, an investment in Berkshire Hathaway has trounced the performance of the S&P 500 Index. The chart below shows total return, which includes reinvested dividends. So if you look at historical results, you would be very attracted to Berkshire Hathaway, and for good reason.
SPY Total Return Level data by YCharts
That performance came largely at the hands of world-famous investor Warren Buffett. While Buffett is not infallible, his long-term approach has clearly worked. From a big-picture perspective his investing style boils down to buying good companies when they appear reasonably priced, or cheap, and sticking with them for the long term. Buffett largely allows the management teams of the companies he invests in to operate autonomously unless there's a very good reason for him to get involved. He tends to favor companies that throw off reliable cash flows, which he uses to invest in other opportunities.
So far there's nothing at all amiss here. For a lot of investors, owning Berkshire Hathaway would be a great decision. But not for every investor.
Berkshire Hathaway doesn't pay dividends
In the comparison to the S&P 500 Index above, the performance figures include reinvested dividends. That is a benefit for the S&P 500, but has no impact on Berkshire Hathaway's performance because the company doesn't pay a dividend. Although Buffett likes to own cash-producing businesses like utilities, pipelines, and train lines, he also likes to hoard that cash so he can use it to invest. At the end of 2023 Berkshire Hathaway had $33.6 billion in cash and another $129.6 billion in short-term investments on its balance sheet.
There are three issues here. First, if you are investing for income, owning a stock that pays no dividend doesn't really make a lot of sense. Second, cash that's basically sitting around, only earning interest (and Berkshire has a lot of cash doing just that right now), is a drag on performance given the higher returns that would likely come from investing that cash in operating assets. Third, although Buffett has a long history of successfully investing on behalf of others, you are trusting that he, and his team, will continue executing at that high level.
Many investors prefer a company to pay dividends so that the shareholders can decide what to do with the money and not management. If that's how you feel, Berkshire Hathaway isn't right for you.
Berkshire Hathaway is very complex
It is also important to understand how complex Berkshire Hathaway is. While it is a single company, it is a conglomerate with its fingers in a vast array of businesses. Some of those businesses are simply stock investments, like Coca-Cola (KO 0.10%) or Occidental Petroleum (OXY 0.47%), while others are fully owned investments, like insurance company Geico or Burlington Northern Santa Fe railroad. But those last two are just a couple of examples of fully owned businesses. Berkshire Hathaway owns companies that operate in retail, chemicals, energy, fabricating, and many more.
It would be virtually impossible for an investor to track the performance of all the companies Berkshire Hathaway owns or invests in. In some ways, the stock is almost like a giant mutual fund. In other words, you have to trust that Warren Buffett and his team are doing the right thing. That may sound easy given the strong long-term performance of the stock over the long term, but Berkshire doesn't always do better than the market.
SPY Total Return Level data by YCharts
As the chart above shows, coming out of the coronavirus pandemic Berkshire Hathaway badly lagged the S&P 500 Index. That's a cherry-picked period, of course, but you would have had to trust that Buffett and his team were making good long-term decisions in order to hold on through that span of underperformance.
Berkshire Hathaway is the product of one man's vision
This last point is a bit sensitive. Although Buffett has a team around him, Berkshire Hathaway is really an entity that he created. It is his ethos that informs the decision-making process. With the death of his long-term partner Charlie Munger, the issue of Buffett's ability to keep running the show has become far more important. For better or worse, the time is fast approaching when Warren Buffett will no longer be the heart of Berkshire Hathaway.
Image source: Motley Fool.
There's no way to know what happens after that point. The company could simply keep going strong, it could break itself up, it could start to crumble, it could start paying dividends -- who knows? The post-Buffett future is uncertain at best. Very conservative investors might want to avoid the risk of buying Berkshire Hathaway thinking that it is one company, only to find that it turns into a very different one after Buffett leaves the helm.
It would not be a mistake to buy Berkshire Hathaway, but...
There's no way to suggest that buying Berkshire Hathaway is an err in judgment. In fact, history suggests that buying it would be a very good decision. And yet the stock still won't be appropriate for all investors. If you like dividends, Berkshire Hathaway won't work for you. If you like simple businesses you shouldn't buy it. And you have to recognize that the longtime CEO will have to hand off his job to someone else sooner rather than later. You might want to monitor the succession process from the sidelines to see if the company changes in any way before adding it to your portfolio. Simply put, no company is perfect for every investor.
