Among investors, one of the most legendary names is Warren Buffett. The billionaire investor has had a long career picking stocks, much of it as chairman of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B).
Like a lot of investors, I use much of Buffett’s wisdom when making my own investment choices. But what if I had simply put £10,000 into Berkshire Hathaway shares five years ago instead?
Large return
The first thing to understand is that, fairly unusually, Berkshire has several classes of shares. That in itself is a result of Buffett’s Midas touch.
The original Berkshire Hathaway shares grew massively in value. They now trade for over half a million dollars each. So the company decided to issue a new class of shares (known as ‘B shares’) to make it more affordable for investors to buy into the company.
In essence, the B shares are like a smaller slice of the company than the original Berkshire Hathaway shares (now known as ‘A shares’).
If I had invested £10,000 five years ago then, I would have been buying the B shares. They have increased in value by 66% during that time.
So my stake would now be worth well over £16,000, excluding exchange rate movements.
Zero dividend
As the shares are listed on the New York Stock Exchange, such exchange rate movements are a real factor I would need to consider as a British investor.
When buying shares traded in a foreign currency using sterling, such moves can work for or against me, depending what happens to the exchange rate during the period that I hold the shares.
I would not have earned any dividends during the past five years, as Berkshire does not pay them.
Diversification and conglomerates
Like any good investor, Buffett knows that it can be very risky to put all the eggs in one basket. But he has often suggested that many investors would do well to invest in a fund that tracks a stock market index rather than in individual companies.
Could investing in Berkshire – which is effectively a business conglomerate — offer me similar diversification?
I do not think so. Berkshire does own a diversified range of businesses, either in whole, or in part. But that on its own does not mean that investing in it offers my portfolio diversification.
After all, something could happen to hurt the Berkshire share price – like an executive power struggle or unforeseen business problem – sending the shares down.
So I would not have invested £10,000 in Berkshire Hathaway shares five years ago without investing in other companies too.
But as long as I had made sure to stay diversified, owning shares in the Sage of Omaha’s business over the past five years would have proved highly rewarding for me.
