What is Berkshire Hathaway (BRK.A -2.04%) (BRK.B -1.96%)? This is not an idle question, nor does it have an obvious or easy answer.
Berkshire Hathaway, an icon on Wall Street, is an incredibly complex entity that probably wouldn't exist if it weren't for one man: CEO Warren Buffett. Here's what you need to know as you consider the buy, sell, or hold call on this massive conglomerate.
Buy Berkshire Hathaway
There probably isn't a bad time to buy Berkshire Hathaway. Likewise, there probably isn't a good time, either. That's not to suggest that the stock price doesn't fluctuate; you can buy it at higher and lower prices.
But from a business perspective, Berkshire is very different from most other companies. It is even dramatically different from most other conglomerates.
Image source: Getty Images.
That is because its portfolio spans a vast array of industries. The list includes insurance, transportation, utilities, energy, retail, specialty chemicals, and apparel, among others. You will have a hard time finding a company on Wall Street with such a wide range of markedly different business lines.
And then there's the company's collection of individual stock investments, which layers even more diversification on top of its owned businesses.
In the end, Berkshire is far more similar to a mutual fund than to a typical company. That goes double when you look at the way Buffett operates the business.
He likes to buy companies (and stocks) when they appear cheap and then hold on for years. He doesn't get into the minutiae of any subsidiary, instead hiring leaders he thinks can do a good job and periodically checking on their progress. Buffett only steps in when there's a reason to do so. That's basically what a mutual fund manager does.
If the mutual fund analogy makes sense to you, then what you are buying is Buffett's investment approach, and there's really no good or bad time to buy that. His approach will always be his approach.
BRK.A total return level data by YCharts.
Hold Berkshire Hathaway
If you own Berkshire Hathaway, which is most likely because of Buffett and his investing strategy, the mutual fund analogy likely makes sense to you, too. As the chart above highlights, the stock performance has been pretty incredible over time.
It has, without question, trounced the S&P 500 index's performance even when you include reinvested dividends to look at total return (as the chart above does). Notably, Berkshire does not pay dividends because Buffett prefers to keep the cash so he can invest it on behalf of shareholders.
Given that long-term track record, why would you want to sell the stock? The company has been an excellent steward of shareholder capital. And you can see why nobody complains about the lack of a dividend, even though the company is currently sitting on nearly $29 billion in cash and owns $153 billion worth of Treasury bills.
That's all earning interest, for sure, but the big story is that it is awaiting Buffett's investment decisions. With it, he has the option of buying more companies; without it, he wouldn't have that option. He would have to take on debt or try to raise capital from investors.
The key, however, is that you have to believe that Buffett will do what's best for shareholders. There's no question he has done just that so far, and it seems highly likely that he'll continue along the same path. Sticking around looks like it would be a good idea for most shareholders.
Sell Berkshire Hathaway
This is where things get a bit more complicated. Nobody lives forever, and Buffett's longtime partner, Charlie Munger, passed away at the end of 2023.
Succession planning is front and center at Berkshire Hathaway. Given the mutual fund nature of the company, bringing in a new CEO is basically bringing in a new portfolio manager. Although Buffett's investment approach and ethos pervade the company, that doesn't mean that the next CEO will invest the same way. Or that the new CEO will have the same investment abilities.
Given that Buffett's tenure at the helm of Berkshire is likely to end sooner rather than later, if you have material gains, it wouldn't be hard to justify taking some profits -- or to consider selling altogether if Buffett's successor doesn't prove to be as adept an investor. In fact, there's a chance that the stock falls when Buffett leaves the lead role, simply because of the change.
This isn't a small issue. First, there's the cash on the balance sheet to consider. Buffett is disciplined with cash; will the next CEO be the same way or try to put it to work? It's even possible that a dividend will be paid to get rid of that cash, which would change the nature of the company.
And then you have to consider the current portfolio of owned companies. Do they remain as independent as they are now, or will a new CEO take a more active role than Buffett? Will that new CEO decide that there's too much complexity and start to sell or spin off assets, effectively dismantling the company Buffett built?
Without Buffett, Berkshire Hathaway could go many different ways. If you own it specifically because of him, you'll want to pay extra close attention to the succession issue. It could end up being the reason you sell the stock.
There are no easy answers
When Buffett was a younger man, the buy, sell, or hold decision with Berkshire was a lot less complicated. You bought it and held it, letting the so-called Oracle of Omaha work what has long appeared to be investment magic.
That hasn't changed just yet, but you have to appreciate that Berkshire Hathaway is operated more like a mutual fund than a traditional company. Buffett has created a strong portfolio of companies, but there's no way to know what happens when he moves on from the CEO role.
