Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is one of the most fascinating stories in the history of investing. In the 50 years Warren Buffett and his management team have been running things, a struggling textile company has transformed into one of the largest corporations in the world, with dozens of household-name subsidiary companies and an equally impressive stock portfolio. In the process, early investors have gotten very rich, with the per-share book value rising from $19 to $146,186 during the past half-century.
In Buffett's most recent letter to shareholders, he discussed his thoughts on Berkshire's next 50 years. Here's what Berkshire investors can expect -- straight from the pen of the Oracle of Omaha:
Berkshire will not be a good short-term trade, ever
Buffett said that the chance of permanent capital loss with Berkshire is the lowest among any single-company investment. But he added a caveat: If the company's valuation is high, say approaching two times book value (it's at about 1.5 times book value now, so not too far off), it could be years before investors realize a profit.
In other words, Berkshire has never been, and will never be, a good "traders' stock." The company has one of the most shareholder-friendly business models in the world, but it is geared exclusively toward long-term investors. As a result, Buffett recommends that investors should look elsewhere for investment options if they plan to hold their shares for less than five years.
Berkshire can survive the "thousand-year flood"
Not only will Berkshire be prepared to withstand any economic storm, but the company is positioned to capitalize when things go bad. The company maintains a huge earnings stream, a great deal of liquid assets, and virtually no short-term cash requirements.
This combination keeps Berkshire immune to virtually any adverse market conditions. This is illustrated by the company's performance during the financial crisis of 2008-09, when Berkshire not only survived, but took advantage of "discounts" in companies like Goldman Sachs.
Berkshire will maintain rather large stockpiles of cash (at least $20 billion at all times, according to Buffett) in order to weather any storm and capitalize on developing opportunities. As Buffett said, "if you can't predict what tomorrow will bring, you must be prepared for whatever it does."
Earnings power will continue to grow
Perhaps Buffett's boldest prediction is that Berkshire can build its per-share earning power every year. This might sound like a lofty expectation, considering he's talking about a five-decade period. However, it could be achievable.
Now, this prediction doesn't mean earnings will increase every year. It does, however, mean that each and every year, Berkshire will create the potential to earn more than it did the year before. Actual earnings gains (and declines) will depend on the U.S. economy, but the company will keep moving forward no matter what the economy is doing.
Past performance will not be duplicated
Many casual observers were put off by the following line from the letter: "Berkshire's long-term gains ... cannot be dramatic and will not come close to those of the past 50 years."
However, this really shouldn't be much of a surprise. There is only a finite amount of money and investment opportunities in the world, and as companies grow, it gets tougher and tougher to maintain a high growth rate. For example, Apple has increased in value by more than 100-fold since 2004. Would it be reasonable to expect the same over the next decade? Of course not! That would make Apple a roughly $70 trillion company.
The same principle applies to Berkshire. Repeating its performance of the past 50 years would produce a book value per share of roughly $1.2 billion, along with a market capitalization of more than $900 trillion, which would be completely impossible in the absence of extreme inflation.
But the right people are in place to deliver for shareholders
While his time at the helm might be nearing its end, Buffett reassured investors that over the next 50 years, no company will be as shareholder-oriented as Berkshire. Buffett is completely confident the company will have the right CEO, management team, and investment specialists in place, as well as safeguards to protect shareholders in the event that the wrong person is put in charge.
As Buffett stated in a past letter to shareholders: when the market soars, Berkshire may underperform; when the market is down, Berkshire will outperform; and over any full economic cycle, Berkshire will outperform the markets. While the days of Berkshire's amazing 20% average annual returns are likely a thing of the past, the company's winning philosophy and business model remain the same, and will deliver for shareholders for decades to come.