Shares of Berkshire Hathaway (BRK.A 0.55%)(BRK.B 0.55%) have gotten caught up in the market sell-off. That's not at all shocking, but the really important fact is that Berkshire Hathaway's decline from its 52-week high is about half of the fall the S&P 500 index (^GSPC +1.18%) has experienced. There's a reason for the better showing, and it all stems from Warren Buffett and his investment team. Here's why buying Berkshire Hathaway could set you up for life, but only if you buy it for the right reason.
Berkshire Hathaway's big cash out
Berkshire Hathaway has a large insurance business, so it is usually classified as a financial stock. However, it is really a highly diversified conglomerate. There are 189 companies under the Berkshire Hathaway umbrella, and they span from insurance to chemicals, with a massive amount in between. The company's business description in its annual report runs a huge 23 pages. Most companies only need a paragraph or two to describe their businesses.
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The real story here is that Berkshire Hathaway isn't your typical company. It is, in reality, the investment vehicle of its CEO, Warren Buffett. To understand why the company he runs has been performing better than the market, you need to understand what Buffett has been doing. On that score, Buffett and his investment team were raising cash throughout 2024 by selling stocks, nearly doubling the cash and short-term investments the company owned.
BRK.A Cash and Short Term Investments (Quarterly) data by YCharts
The extra cash on the balance sheet is likely, and correctly, being viewed as a vital offset for the company from the risk being posed by the current market downturn. The real benefit of that cash, however, is likely to be longer-term in nature.
What you are buying when you buy Berkshire Hathaway
The move Buffett and his team made into cash is an important signal. This isn't your typical company. When you buy Berkshire Hathaway, you are, in effect, giving Warren Buffett and his team your money so they can invest it for you. In this way, Berkshire Hathaway is kind of like a mutual fund. And a very rare one, performance-wise, because it has so consistently outperformed the S&P 500 index over time.
BRK.A Total Return Level data by YCharts
That said, the fact that Berkshire Hathaway's cash position rose dramatically in 2024 is probably more luck than anything else. Buffett isn't a market timer, and the company has to move slowly when selling stocks because of the massive size of its holdings. So, it probably isn't appropriate to imbue Buffett and his team with any special abilities in regard to selling out prior to what appears to have been the market top.
The real benefit of this cash is in what Buffett and his team can do with it now that stock prices are coming down. Buffett normally tries to buy good companies when they are attractively priced. He then holds for the long term, benefiting from the growth of the business over time. It is hard to find attractively priced companies when the markets are frothy, a fact Buffett alluded to in his 2023 note to shareholders.
NYSE: BRK.A
Key Data Points
With prices coming down in the stock market, though, it could soon be time for an acquisition or two. Given Berkshire Hathaway's massive size (it has a roughly $1 trillion market cap), small deals won't move the needle. So, look for something big and newsworthy. That transaction is where Buffett and his team are going to be adding the most value for shareholders.
It's always the right time to hire a good money manager
There are clearly better times and worse times to buy shares of Berkshire Hathaway stock. But there's really never a bad time to hire a good money manager, which is what Buffett is if you step back and look at Berkshire Hathaway as more than just a company. And if history is any guide, the giant conglomerate could set you up for a lifetime of strong investment decisions if you buy it today. Indeed, it might make sense to buy Berkshire Hathaway while investors are busy running for the hills because of the market downturn. This dislocation is what will likely set Buffett and his team up for their next big acquisition.
