There are many good reasons for Brits to invest in Buffett's Berkshire Hathaway.
This article forms part of our Duelling Fools feature on 'Should Brits Buy Buffett'. You can also read the case against and vote in our Duelling Fools poll.
Warren Buffett's insurance-based conglomerate, Berkshire Hathaway, is one of the greatest investment stories of all time. Buffett, a successful private client investment manager, took control of the struggling New England textile manufacturer in 1965 when its share price was $18 and the price today is around $99,000.
Is Berkshire Hathaway is a worthwhile investment for a British investor? I'd argue yes; not just because Berkshire is a superior business but also because America's economy is far stronger than Britain's and is likely to remain so for the foreseeable future.
What is Berkshire Hathaway?
It is easiest to view Berkshire as having three parts:
- the insurance companies, headed by General Re which is one of the largest reinsurance companies in the world;
- an investment portfolio, which includes 8.6% of Coca-Cola and 22.6% of the Burlington Northern Santa Fe railroad; and
- a diverse collection of businesses which Berkshire has purchased over the years
You can find the full list of Berkshire's subsidiaries here, they include the Acme Brick Company and the world's largest provider of private aircraft fractional ownership, Netjets. These are not small companies; some of them on their own are worth tens of billions of dollars. The key to understanding these businesses is that each has what Buffett calls a "moat", a sustainable competitive advantage such as a strong brand name or large barriers to entry, which protects the business from competition
Buffett runs the investment portfolio and oversees the insurance companies' investments whilst Berkshire's managers run their businesses. Buffett regularly says that his job is all about allocating capital, a major part of which is investing the premiums received by the insurance companies which are effectively an interest-free loan to Berkshire. Whilst in most conglomerates managers invariably reinvest profits in their subsidiary, frequently obtaining terrible returns, Berkshire's managers are incentivised to send capital to HQ for redeployment if better returns can be obtained elsewhere.
Financials
In 2008 Berkshire earned $3,224 per share, down from $8,548, putting the shares on a historic P/E ratio of almost 31. Berkshire's earnings per share for the first half of 2009 was $1,136, having made a loss in the first quarter. That's a high P/E ratio, but not so unusual given the severity of the recession and should earnings recover to 2007 levels you're looking at a P/E in the low teens.
Buffett regularly refers to Berkshire's net asset value per share (NAV) which was $70,530 in the 2008 accounts. You'll sometimes see the argument that Berkshire must be overpriced because its share price exceeds its book value; this incorrectly assumes that Berkshire is an investment trust (most companies trade at a premium to their NAV). Today's premium to the NAV is fairly low compared to past premiums.
But don't expect a dividend; the last one was paid in 1967; Buffett says that he must have been in the bathroom when it was declared!
Built To Last
Berkshire's future will be driven more by its businesses and less by its investments. I'd expect the investments to be gradually moved into the businesses via organic expansion and acquisitions.
Age is often put forward as a reason to not invest in Berkshire, as Buffett is 79 years old and Berkshire's deputy CEO Charlie Munger is 85, but as last week's BBC programme showed both gentleman remain as sharp as the proverbial tack and probably have many more years ahead of them. Succession concerns should be assuaged by the quality of the managers of Berkshire's subsidiaries and several of them, such as David Sokol, the CEO of MidAmerican Energy (which owns Britain's Northern Electric), are more than capable of taking over the day-to-day running of Berkshire.
Buffett is Main Street's Elliot Ness compared to Wall Street's Al Capone; he's built a business in his image and intends for it to last. When he retires Berkshire's subsidiaries will continue to operate as they do today because his and Munger's way of doing business is firmly ingrained in Berkshire's corporate DNA. After all, General Electric went on to great things after Thomas Edison's retirement. I'd expect Berkshire to perform similarly.
America Is The Better Long-Term Bet
An investment in Berkshire is an investment in America. I'd argue that America is a much better long-term bet than Britain because America lacks the hostile and envious attitude towards business that pervades British public life and which over the years has had such a corrosive effect upon our economy. It's no surprise to me that America has recently emerged from its recession whilst Britain's economy continues to decline.
Americans possess a strong work ethic which Benjamin Franklin summed up as "it is the working man who is the happy man; it is the idle man who is the miserable man." Uncle Sam gets on with the job whilst Britannia is still preparing the health and safety report. The business of America is business.
Yesterday morning Buffett showed his confidence in America by making what he called an "all-in wager on the economic future of the United States" when Berkshire announced an agreed takeover bid of $44 billion for the 77.4% of Burlington Northern Santa Fe that Berkshire doesn't already own.
Whilst new investors won't make a fortune because Berkshire's size makes it far harder to deploy capital in the volume and quantity of investments that produced some of its spectacular returns in the past, Berkshire shareholders should be comfortable thanks to the quality of its businesses.
I'll leave you with the words of the man himself from page 3 of the 2008 annual report: "Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
Berkshire gives you the best of America.
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> Tony owns shares in Berkshire Hathaway
