If you're looking for a stock that's generated life-changing returns over the long run, it's hard to beat Berkshire Hathaway (BRK.A +0.09%) (BRK.B +0.33%). The Motley Fool's data on the stock only goes back to 1985, but even in that roughly 40-year span, Berkshire has generated returns of over 260,000%. Those gains have far outpaced those of the broader stock market, and even now that Warren Buffett is no longer CEO, his presence remains felt in the confidence of Berkshire's shareholders.
Yesterday, the first article in this series for the Voyager Portfolio looked at Berkshire's history and some of the early investments that led to its market-crushing returns. Today, turn your attention to Berkshire's financial results, because there's an important thing you need to know about what you'll find in the conglomerate's quarterly reports in order to avoid making some incorrect conclusions about the strength of the underlying business.
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Why Berkshire's financials are so confusing
If you look at a typical set of financial information for Berkshire Hathaway, a couple of things stand out. From a revenue standpoint, Berkshire appears to be following a steady trajectory higher. However, when it comes to net income, the company's numbers are all over the place. In just the past five years, Berkshire has had one year in which it reported net income of close to $100 billion. But that came right after a year in which the company reported a loss of almost $23 billion. Even among companies of a similar size to Berkshire, you'll almost never see this kind of volatility.
NYSE: BRK.B
Key Data Points
The key to understanding the ups and downs in these figures is that Berkshire invests its capital in two primary ways. Sometimes, it purchases a business outright, making it a wholly owned subsidiary of Berkshire. Among the companies that Berkshire has acquired in their entirety are the businesses that currently make up Berkshire Hathaway Energy as well as the BNSF railroad business. When that happens, the revenue and net income of that business become part of the overall financial results of the entire conglomerate. Those numbers tend to look more like what you'd expect to see at other companies.
Beyond those wholly owned subsidiaries, however, Berkshire also keeps a significant amount of capital invested in minority interests of publicly traded stocks. The top five companies currently among Berkshire's holdings are Apple (AAPL +0.42%), American Express (AXP +1.71%), Bank of America (BAC +3.24%), Coca-Cola (KO +0.37%), and Chevron (CVX +0.84%). Together, those five stocks represent about $185 billion of value within the Berkshire Hathaway investment portfolio.
Unlike with wholly owned subsidiaries, Berkshire's financial results don't include its proportional share of the financial results of Apple, American Express, or any other minority-owned business. Instead, Berkshire reports a separate gain or loss each quarter based on the changes in the fair market value of its investment portfolio. So if Apple reported quarterly results that showed strong gains in revenue and profits, that wouldn't show up anywhere in Berkshire's numbers. Moreover, if Apple stock dropped despite that strong performance, Berkshire would have to take a loss under generally accepted accounting principles. Indeed, it was the bear market in stocks that took place in 2022 that played a key role in Berkshire's reporting an overall loss for the year.
2 elements of Berkshire's success
Therefore, when you look at Berkshire's financials, the positive impact on Berkshire Hathaway's stock has come from two sources. Berkshire's wholly owned subsidiaries have generally performed well, and Buffett and his peers have had a good track record in making investments for Berkshire's stock portfolio.
The big question going forward, though, is whether Berkshire Hathaway will be the same now that Warren Buffett has stepped down as CEO. In the third and final article of this series for the Voyager Portfolio, you'll learn more about what lies ahead for Berkshire and why it's a valuable holding for any investor to have.
