Berkshire Hathaway (BRK.A -0.67%) (BRK.B -0.87%) is a unique business. It's primarily an insurance company, but it also sells furniture, energy, homes, underwear, and private jets. And the company has amassed a stock portfolio that would make most long-term investors jealous. One of Warren Buffett's biggest criteria when deciding what to buy is identifiable competitive advantages -- of which Berkshire has quite a few of its own.
Berkshire isn't afraid to let go of control
One of Berkshire's biggest competitive advantages is that Warren Buffett and his team aren't afraid to invest in businesses they don't control. This applies to Berkshire's subsidiaries, as well as to the famous stock portfolio.
In his 2014 letter to shareholders, Buffett laid out his acquisition criteria in plain English. One of his set-in-stone requirements is that the target already has management in place since Berkshire has no interest in managing each of its subsidiaries itself. Many people don't realize it, but Berkshire Hathaway has few employees for such a large company -- the entire staff consists of just 25 people as of this writing. This is even more impressive considering that they oversee a collection of businesses with more than 360,000 employees.
Buffett has always placed tremendous value on good managers when deciding which companies to acquire and which stocks to buy. Berkshire provides support when necessary, but leaves its managers alone to run their respective operations.
And, in this year's shareholder letter, Buffett emphasized how Berkshire's willingness to make large sums of money in businesses it doesn't control at all (stocks) is a tremendous advantage over peers. Most companies limit their acquisition strategies to companies they will operate, but Berkshire likes the flexibility to invest in any good business. Plus, unlike wholly owned subsidiaries, stocks are liquid assets -- meaning that they could be sold on short notice to raise capital if necessary. As of the end of 2015, Berkshire's stock portfolio was worth more than $112 billion. That's a heck of a lot of financial flexibility.
Perhaps Berkshire Hathaway's biggest competitive advantage is that its revenue doesn't depend on just one source. Rather, the company generates revenue from more than 60 different subsidiaries in many different businesses, as well as dividend income from its stock investments.
Just to name a few of the more well-known names, Berkshire's subsidiaries include:
- BNSF Railroad
- Clayton Homes
- Fruit of the Loom
- Helzberg Diamonds
- Pampered Chef
In addition, Berkshire's stock portfolio represents a variety of businesses, and many of them are sector leaders that have historically thrived in any economy.
This kind of diversification means that Berkshire is somewhat insulated from sector-specific headwinds, as well as overall economic weakness. For example, if the U.S. economy were to go into a recession, some of Berkshire's businesses, such as NetJets and Pampered Chef, would probably see revenue drop. On the other hand, businesses like Berkshire Hathaway Energy (BHE) are virtually immune to recessions. Even better, other businesses, like Wal-Mart (a major Berkshire stock holding) actually do better when times get tough.
All of Berkshire's investments -- including its wholly owned subsidiaries and stock portfolio -- represent businesses that pass the "50 year test." In other words, all of these businesses have an identifiable advantage over peers and operate in industries that are timeless. That is, these businesses will always be needed.
This is one reason Buffett has historically avoided tech stocks and loaded up on bank stocks like Wells Fargo and U.S. Bancorp. Will people still need laptops, cell phones, and tablet computers in 50 or 100 years? Maybe, but maybe not. On the other hand, we'll always need safe places to put our money.
Berkshire's individual businesses have their own advantages
In addition to the advantages that apply to Berkshire as a whole, keep in mind that each of the subsidiary businesses was hand-picked for its own competitive advantages. GEICO has a big cost advantage over peers and Berkshire Hathaway Energy has much more earnings diversity than most other utility companies, just to name a couple of examples.
This is by no means a complete list of why Berkshire Hathaway is an excellent business, but is a good starting point. In fact, I could write entire articles about some of the other reasons to love Berkshire, like its strong balance sheet or its incredible managers and stock-pickers, just to name a couple of other reasons to like Berkshire. My point here is that Berkshire Hathaway is a unique business run by the best in the business that deserves consideration for any long-term portfolio.