This past weekend, the investment world descended on Omaha, Nebraska; best known perhaps as the hometown of one of the most successful investors in the world. Warren Buffett, also known as the “Oracle of Omaha”, will be hosting investors at the annual Berkshire Hathaway shareholders meeting. The schedule is filled with presentations, shopping & dining experiences, and social interactions that will be the highlight for many individual investors.
The investment community has been fascinated with Warren Buffett for his colorful comments and impressive track record. He has proven to be a in a class all by himself looking for good companies at an attractive price and has never been scared to be a contrarian. Flipping through the pages of the 2014 Berkshire Hathaway Annual Report, we can’t help but notice that many of the principles Buffett applies to prospective investments are now making his own company look very attractive.
The class ‘B’ shares of Berkshire Hathaway (BRK.B) currently trade at $141.21 per share while the ‘A’ shares trade for an impressive $213,400 per share! Through the first four months of the year BRK.B is down -5.93% while the S&P 500 is up 1.3%. Buffett has been quoted as saying, “price is what you pay, value is what you get.” Last year (2014) the S&P 500 delivered an impressive 13% and BRK.B doubled that, rewarding investors with a 26% return for the year.
You don’t have to look far in Buffett’s annual report (page 2 in fact) to dig into the historical numbers and read both his personal opinion and outlook for the company. Since he founded the company he has compared the yearly performance of the S&P 500 to the change in Berkshire’s per-share book value. This reflects the true intrinsic value of the company and offers a comparison to their benchmark. From 1965 through the end of 2014, the S&P 500 (with dividends included) has returned 11,196% (9.9% compounded annually). Berkshire Hathaway posted an overall gain of 1,826,163% which breaks down to 21.6% annually – no… those are not typos! These numbers reflect the data for the ‘A’ shares, whereas the ‘B’ shares (“Baby Berks”), have only been in existence since 1996, and are valued at 1/1500th of the ‘A’ shares.
The data going back to the creation of Berkshire Hathaway paints a compelling story. If you look at every year the S&P 500 posted a negative return of -10% or more (6 times) and then compare to Berkshire Hathaway for the same year, Berkshire outperformed the index by an average of 6.65%. On the flip side the S&P 500 posted positive returns of 10% or more a total of 30 times over the past 49 years. The S&P 500 averaged 22.7% during those years while Berkshire Hathaway averaged 40.18%.
While those numbers are certainly impressive Buffett does not hide from any negative news regarding Berkshire. Rather than candy coat it or attempt to hide it in the 142-page report, he addresses it directly and shares how they plan to turn it around. The “Powerhouse Five” – a collection of Berkshire’s largest non-insurance businesses, had a record for pre-tax earnings in 2014. Of this group the railroad company BNSF was a disappointment, but much of that drag was due to severe weather. Buffett, however, clearly states that the company will do “whatever it takes” to bring BNSF back to industry leading levels. They plan to spend $6 billion on equipment and plants in 2015, which is 50% more than any other railroad has spent in a single year! They are already seeing improved results over the last three months as performance has improved over last year’s figures.
Looking forward the future of Berkshire Hathaway appears to be promising. Buffett clearly states, “ I believe that the chance of a permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments.” He is quick to caution, however, that if investors buy at an unusually high price it could be years before the investor would realize a profit. Berkshire is not an investment for those with a short-term horizon or ‘day trader’ mentality.
“Since I know of no way to reliably predict market movements, I recommend
that you purchase Berkshire shares only if you expect to hold them for at least
five years. Those that seek short-term profits should look elsewhere.”
– Warren Buffett, 2014 Annual Report
Where does this leave us?
Throughout the year volatility and the market in general have presented us with a variety of opportunities. Once we lock in profits on an investment we search for the next opportunity that presents value at an attractive entry point. With the pullback that Berkshire Hathaway has posted the first four months of this year we are prepared to jump on board with Warren Buffett. As he clearly states this is a stock that we plan on tucking away and allowing it to do what it has done for nearly 50 years – grow and provide solid returns. BRKB is often pushed to the side by investors as it doesn’t pay a dividend. In our opinion we believe that shouldn’t sway you away as this stock is truly unique inside and out.
If you would like to discuss if Berkshire Hathaway should be a position in your portfolio we encourage you to contact us via the form below.