Berkshire Hathaway... The Perfect Stock?

When thinking of the perfect stock investment it depends on whether you are young or old, and would like capital growth or income. Another thing to consider is that your investment is tax efficient, which is why I have so many PIE (Portfolio Investment Entity) investments. The dividends PIE investments give out are not subject to withholding tax, and thus are only taxed once, at the company level. An alternative tax efficient way to receive dividends is to have the company reinvest their net earnings instead of paying out those earnings as dividends. This is why Berkshire Hathaway has not and will not ever pay a dividend; Warren Buffett has always argued their investors will be better off over the long term when Berkshire puts its earnings into new investments. And by looking at their track record since 1965 this has definitely been the case, as they have grown their book value at an average rate of 20% vs. 10% from the S&P 500.

Berkshire started its life as a textile manufacturer in 1839 as the Valley Falls Company in Rhode Island. In 1962 Warren Buffett started buying stock of a company fast in decline, on the back of Benjamin Graham's 'cigar butt' investment strategy. This strategy, taught to Buffett as a young man by Graham, said that the best investments are made by buying companies that the market has left for dead but have one or two puffs left in them. Warren figured that Berkshire was one of these companies. A disagreement with management in 1966 made Warren buy all of the stock of Berkshire. Initially he kept the core textile business until he realized that it was a failing industry and he would be better off changing Berkshire's business plan. Insurance was the the initial focus of the new business, in particular GEICO, which today is still the core of its insurance investments. Insurance was good for acquiring capital, especially in the early days, because Berkshire could invest the float before they had to make any payouts. In 1978, Warren's best friend, Charlie Munger joined the business as its vice-chairman. His input was very important, as he introduced the concept of buying quality businesses at fair prices, as compared to the fair businesses at good prices mantra. In 2022 Berkshire had $300B in total revenue and $930B in total assets.

The main holdings are Apple, Bank of America, Chevron, Coca Cola and American Express. Apple comprises 39% of its portfolio and is by far its biggest investment. It has been called by Buffett to be 'the best business in the world'. It is the world's largest company by market capitalization, and so is also the largest holding of the Total World Fund and the S&P 500. Other holdings of Berkshire include Activision Blizzard, Citigroup, Diageo, J&J, Kroger, Mastercard, P&G, and Kraft Heinz. Technology represents 49%, Financials are 22%, Consumer staples 12% and Energy is 10%. Financials are comprised of Banks and Insurance companies, where the aforementioned float is used to make new investments. Over the last year Berkshire has risen 19%, as compared to 11% for the S&P 500. Over 5 years Berkshire also beat the S&P, rising 70% compared to its 62%. And over the last 50 years they have basically doubled the markets return. Time and time again, Berkshire have proven themselves to be a superior investment to the market index. The problem is the age of the leading men, Buffett (92) and Munger (99).

But if you are confident in the management team that Buffett and Munger have put in place to control the company beyond their deaths; there are a lot of worse investments you can make. Berkshire has two classes of stock (A and B), its A stock is $535,000 and its B stock is $351. With the advent of fractional shares, it doesn't really matter what class of stock you invest in. As for being the perfect investment, there are a lot of companies who have done better than Berkshire over the last few years. But you would be hard pressed to find many that have done better over the last 50.