If there is one name that reliably perks up ears on Wall Street, it is Warren Buffett, the CEO of Berkshire Hathaway (BRK.A 0.03%) (BRK.B +0.14%). That's because the company he heads has performed so well over the long term that he's been given the nickname "the Oracle of Omaha." Some investors even try to model their investment decisions based on the stocks in the Berkshire portfolio. Others take the easy route and just buy Berkshire's stock.
As exciting as it is to potentially profit from a living Wall Street legend, investors need to understand that Berkshire Hathaway isn't a "normal" company, and its stock is best suited for a certain type of investor. They need to take a closer look at how the stock operates before they buy shares.
Berkshire Hathaway has an incredible record
Giving credit where credit is due, since the turn of the century, Berkshire Hathaway's stock has risen roughly 1,000%. That's incredible performance when you consider that the S&P 500 index, using SPDR S&P 500 Index ETF as a proxy, has gained "just" 260% over the same span. Even if you reinvested dividends, the total return on the S&P 500 only rises to around 460%, still trailing well behind Berkshire Hathaway, which doesn't pay dividends at all.
Image source: The Motley Fool.
There's no question that Berkshire Hathaway's outperformance has a lot to do with Buffett. The man has proven again and again that he has a knack for finding great investment opportunities and the emotional strength to stick around through hard times. That has allowed the company he runs to benefit from the long-term growth of the businesses in which he has invested.
But his actual investment approach is a bit unusual. Buffett likes to invest in well-run companies when they are reasonably priced (or even better, when they are unloved). Then he lets the management teams of those businesses do their job, only stepping in if there's a reason to do so (like lingering poor performance). Otherwise, he's pretty hands-off. That is true for both businesses that Berkshire buys outright and for the stock investments it makes.
So what exactly is Berkshire Hathaway?
Berkshire Hathaway is a conglomerate with a vast array of subsidiaries. It also owns a collection of stock investments, where it is just a large shareholder in a given company. If you buy shares of Berkshire Hathaway, you aren't really buying a specific business so much as you are buying into Warren Buffett's investment approach. That's clearly been a good decision given the past performance. But it may not be the right decision for all investors.
NYSE: BRK.A
Key Data Points
For example, if you like to dig into the details of the companies you own to get a deep understanding of how they operate, well, you'll only find frustration at Berkshire Hathaway. Not only is Buffett notoriously secretive, but the list of businesses the company owns is huge and shockingly diverse. For example, it owns a furniture retailer, a utility, a paint company, a railroad, a metal parts maker, and a pipeline operator. Then there's the massive insurance businesses it owns, including GEICO. There is no rhyme or reason to the list of what Berkshire Hathaway owns other than Buffett liked them when he bought them. And Berkshire doesn't actually provide a huge amount of detail about most of the subsidiaries it owns.
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Key Data Points
Layered on top of the owned businesses is the stock portfolio, which is also an eclectic list, only it can change fairly quickly as Buffett and his team buy and sell stocks. Right now the portfolio includes long-term holdings like Coca-Cola and Chevron. But a recent exit was Paramount Global, an investment that Buffett has described as a mistake in which he lost a lot of money. In other words, everything he touches doesn't turn to gold despite having an enviably great long-term investing record. And, because Berkshire is buying and selling on a regular basis, you won't be able to keep precise track of the stock portfolio.
The big takeaway here is that you are giving up a huge amount of control when you buy Berkshire Hathaway stock. You are, in essence, giving your money to Buffett and his team and letting them invest for you. That's more like a mutual fund than a stock investment. If you like to call the shots in your portfolio, Berkshire Hathaway's business model probably won't make a lot of sense for you.
Great company, but an acquired taste
It is hard to argue with the success Berkshire Hathaway has clearly achieved, and it will probably be a great investment for a lot of people. But you have to understand what you are buying when you go in, or you might find it doesn't work well with your own investment approach. And that's the problem with Berkshire Hathaway: It is so singular that many investors will find owning it -- which effectively requires handing the investment reins to Buffett -- hard to justify, even though the stock has performed so well over the long term.
