Here are 6 reasons not to buy shares in Berkshire Hathaway.
This article forms part of our Duelling Fools feature on 'Should Brits Buy Buffett'. You can read the case for buying here and let us know what you think by voting in our Duelling Fools poll.
Warren Buffett worshippers (of which I am one) delight in the fact that, despite his $37 billion fortune and his close friendship with Microsoft founder and multi-billionaire Bill Gates, he has remarkably simple tastes.
For instance, the 'Sage of Omaha' avoids haute cuisine and lives largely on cheeseburgers and Cherry Coke, explaining that "'If a three-year-old doesn't eat it, I don't eat it." Although he's been a millionaire since 1962, Buffett still lives in the modest house which he bought that year in the Midwest town of Omaha, Nebraska. Also, he dislikes inherited wealth and has made plans to give almost his entire fortune to charity.
Despite Buffett's reputation as a super-investor, I'm going to argue today that it would not be attractive for you, as a UK-based investor, to buy shares in Buffett's vehicle, Berkshire Hathaway. Here's why:
1. Buffett wouldn't buy Berkshire
As Warren has remarked in the past, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." In particular, Buffett cautions against buying Berkshire's stock when its share price is higher than its per-share book value.
In other words, Buffett would only be a buyer of Berkshire shares if they were selling at a substantial discount to their underlying intrinsic value. As his mentor Ben Graham said, "Price is what you pay; value is what you get." Currently, there isn't a high value discount on offer, so Buffett wouldn't buy Berkshire shares right now.
2. Buffett is not immortal
Warren Buffett turned 79 this summer. Buffett's closet associate, Berkshire's vice-chairman Charles Munger, is 86 next New Year's Day. Neither is immortal -- and there's a fair chance that one or both will die before the next decade is up.
Buffett is working on succession planning at Berkshire, with Ajit Jain (who runs Berkshire's reinsurance businesses) the current favourite to step into Warren's shoes. Nevertheless, it could be that the 'cult of Buffett' dies with the great man himself, leaving Berkshire as just another well-run mega-business that doesn't offer market-beating returns.
3. Buffett offers no performance guarantee
Berkshire Hathaway's past performance is truly remarkable. Since 1965, the per-share book value has risen by a compound 20.3% a year, versus 8.9% a year for the S&P 500 index. Over this period, a dollar in Berkshire has become $3,623, versus $43 for the S&P 500, or nearly 85 times as much.
However, having Warren at the helm is no guarantee of great performance. For example, last year was Berkshire's worst-ever year, with net income plunging by 96% in the final quarter of 2008. For 2008 as a whole, net income fell almost 60%. This led to a 32% fall in its share price and a 9.6% drop in its per-share book value last year. Even with Buffett behind it, Berkshire still has the odd bad year.
4. Elephants don't gallop
Here we come to perhaps the best reason for avoiding Buffett. Veteran UK investor Jim Slater once remarked that "Elephants don't gallop". What he meant was that while small companies can grow remarkably fast, giant corporations tend to grow more slowly and steadily.
Today, Berkshire Hathaway's market capitalisation is a share over $153 billion (£94 billion), making it one of the world's largest mega-caps. It is highly unlikely that, over the next several years, Berkshire's share price could grow at anywhere near 20% a year.
Indeed, Buffett himself has often warned that future growth is likely to be more sedate. His 'universe' of potential investments is now much smaller and he is unable to move in and out of positions as easily as most investors can, both of which act as a serious drag on his returns.
5. The share price is colossal
The A shares in Berkshire Hathaway don't come cheap. As I write, a single share costs $98,750, so one Berkshire share will set you back close to £60,600. This is a hefty sum to put into a single company, even for a moderately well-off investor with a six-figure portfolio. Most investors don't even have £60k to invest, never mind sticking it all into a single share.
However, there is an alternative: the B shares in Berkshire Hathaway carry one-thirtieth of the voting rights of a B share. This makes them more liquid and, currently, they trade at $3,265 (a smidgen over £2,000) apiece. However, that's still a fair amount for some investors, especially those making their first foray into shares.
Buffett obviously saw this part of my argument coming though. As part of the mammoth deal announced on Tuesday, he's proposing a further 50 for 1 split of the B shares. It still requires shareholder approval but bite-size Buffett could be soon be available to the masses.
6. The dollar may damage your returns
Note that Berkshire shares are denominated in US dollars, and most of his investments are in US businesses. Thus, by buying them as a UK-based investor, you expose your wealth to the ups and downs of currency exchange rates.
For example, one pound is currently worth $1.63. However, if the pound strengthened against the dollar by 10%, then £1 would be worth $1.79. In effect, this would make your Berkshire shares worth around 9% less in sterling terms.
Of course, it's almost impossible to predict future dollar-sterling levels, so it could be that the exchange rate goes in your favour, with a stronger dollar boosting your returns from US stocks. However, you can't be sure which way this goes, so just be aware that exchange-rate fluctuations can have a big impact on your returns.
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