Warren Buffett and his Berkshire Hathaway (NYSE:BRK-B) (NYSE:BRK-A) empire are often considered the industry leaders when it comes to delivering results for investors, and rightly so. Here are three compelling reasons Berkshire Hathaway remains worthy of your money today.
1. It's diversified
While many may not know this, at its core, Berkshire Hathaway is an insurance business. In large part, Buffett has made his money on what is known as the "float," which is the difference between what is paid from insurance premiums versus what is paid out in insurance claims. Buffett has taken that money and in turn invested it in other businesses over the course of his lifetime, and has now built a company that does just about everything.
Consider the earnings from its various business segments through the first nine months of 2013:
As you can see, Berkshire Hathaway's $17.6 billion in earnings before taxes this year has been derived from a number of operating businesses, and the chart above actually excludes the $4.8 billion in gains it has had from its investments and derivatives. Even among its core business of insurance, it also has a significant amount of diversification, with four operating segments that help contribute to the net investment income available to it.
Shown a little differently, of Berkshire Hathaway's $14.5 billion in earnings that are available to shareholders, the company has a dramatic number of different business it operates in:
So, why is all of this important? Without diving into too much detail, many people are best suited to invest in diversified index funds that track the performance of the S&P or other related indexes because beating the market is awfully tough. By investing in Berkshire Hathaway, you'd essentially be putting your money into an index fund with a wide-ranging scope of companies and industries that is run by one of the best investors ever.
This also all goes without mentioning the massive $92 billion worth of investments in publicly traded companies that Berkshire Hathaway holds, with almost 70% of it held in five of the most recognizable and popular companies:
Certainly there are other companies, like General Electric (NYSE:GE), that are also diversified with a host of operating businesses:
And while one could argue that GE is a more diverse company, it essentially has two segments: its industrial businesses and its financial business. You would do well to consider both companies, thanks to their diversified nature, but remember that it was GE that came to Buffett during the financial crisis in 2008 after its financial arm (GE Capital) overextended itself and the company agreed to pay Berkshire Hathaway a 10% dividend on its $3 billion investment. While GE paid back Buffett in 2011, we should remember which company supported the other.
2. It's still delivering results
In the annual letter to Berkshire Hathaway shareholders, the first page is always a comparison of Berkshire's corporate performance versus the S&P 500. From 1965-2012, Berkshire has had a compounded annual gain of 19.7% per year, versus the 9.4% gain seen by the S&P 500 when including dividends. This means that if you'd invested just $1 in Berkshire Hathaway in 1965, you'd have $5,868 today. But if you'd invested in the S&P 500? $74.
While Warren Buffett and Berkshire Hathaway have done an astounding job over the lifetime of the company, the SEC would like to remind us that "past performance does not necessarily predict future results," and many have begun to question whether Buffett and Berkshire can keep it up. In fact, if you look at the raw growth of Berkshire Hathaway's book value each year, you can see how dramatically different its returns from 2000 to 2012 compare to previous years:
For the 14 years since 1999, Berkshire Hathaway has seen its annual book value grow more than 20% in only one year (2003). By comparison, in the 34 years between 1964 and 1998, it happened 21 times. Has Buffett lost it?
The answer is, of course not.
If you compare the five-year return of Berkshire Hathaway's book value relative to that of the total growth of the S&P 500, you'll actually see that that five of the top six of Buffett's greatest feats beating the market have occurred in the last 15 years:
Here we can learn that despite its naysayers, in the face of incredibly difficult market conditions, Buffett and Berkshire Hathaway continue to resoundingly beat the market.
3. It still has ammunition
It would likely be compelling here to talk about Berkshire Hathaway's price-to-earnings multiple or some other quantitative value that may spark your interest. While there are certainly a number of compelling metrics to point to, the one I think is most interesting is this: $42,709,000,000.
As of September 31 of this year, that's how much cash Berkshire Hathaway had sitting on its balance sheet. When Buffett first made his comment in the 2011 letter to shareholders that "[w]e will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy," Berkshire had almost $5 billion less cash than it does today. While Berkshire and Buffett have certainly made a few major acquisitions and investments since that time (including a recent $3.5 billion investment in ExxonMobile), it is not unlikely to think there could be a few more on the horizon.
And when you consider a company armed with $43 billion in cash, a diverse and profitable set of businesses, and astounding long-term success, you would likely be hard-pressed to find more compelling investment consideration.