Berkshire Hathaway, Warren Buffett’s famous investment vehicle, last week became the first US company outside the technology sector to surpass $1 trillion in market value.
Buffett has run Berkshire since 1965, transforming it from a failing textile company into a huge conglomerate, with incredible results. From 1965 to the end of 2022, Berkshire’s stock rose 3,787,464%, far outpacing the S&P 500’s gain of 24,708%. A $10,000 investment in Berkshire in 1965 would now be worth more than $378 million. That’s a capital gain Labour could only dream of getting their hands on.
Nevertheless, it pays to look a little deeper into what is driving Berkshire’s frankly outstanding success. Two of these performance drivers are reasonably well-known – but one less so.
It is common knowledge that Berkshire likes to buy relatively cheap, growing companies with high returns, companies like Coca-Cola and Apple, and then own them for a long time. As Buffett said in the 2008 annual report – “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Also well-known is that Berkshire buys a lot of private companies. Around 65% of Berkshire’s investments are private and 35% are listed on the stock exchange. Owning private companies allows Berkshire to take a longer-term view of investments and ignore the ebbs and flows of the stock market.
Yet one of the key ingredients to Berkshire Hathaway’s success flies somewhat below the radar; its unrivalled access to cheap money. Through GEICO, its subsidiary insurance business, Berkshire can borrow at low rates and invest the proceeds; for every dollar of capital that Berkshire owns it invests $1.70 thanks to this ability to borrow cheaply.
Like most insurance businesses, GEICO collects premiums in advance at the beginning of the year and pays out any claims over the following year. This pattern of up-front cashflows provides Berkshire with a cheap “float” of borrowings, which is then invested in opportunities as they arise. This provides exactly the type of competitive advantage Buffett looks for in the companies he invests in.
At the last annual shareholder meeting, Buffett warned that Berkshire’s size could become an obstacle to future returns, with “no possibility of eye-popping returns”. Yet the corollary is that it looks very well-positioned for what is proving to be an uncertain economic and geopolitical backdrop and “should do a bit better than the average American corporation with materially less risk of permanent loss of capital.”
The shareholder meeting carried special poignancy for Buffett, marking the first since the passing of his longtime investment partner, Charlie Munger, who died late last year at the age of 99. Munger’s death has heightened concerns about the future of the business once Buffett, now 94, steps down. An inevitable changing of the guard looms on the horizon, with Greg Abel, Vice Chairman of Berkshire’s non-insurance businesses, seen as the likely successor. Only time will reveal what shape that transition will ultimately take.
But as Buffett himself wrote in a 2015 shareholder letter entitled, Berkshire – Past, Present and Future, that marked the 50-year anniversary of being in full control, “Berkshire is ideally positioned for life after I leave the scene”.
The Past has been spectacular, the Present is solid, and while the Future may look different, it shines just as bright — much like Apple’s journey after Steve Jobs, the path ahead for Berkshire Hathaway remains to be seen but the potential is undeniably there.