I approach investing with a long-term focus. And one way of doing that is by thinking about which shares I can say today I’d be happy to buy for the next decade.
There aren’t many companies I can confidently say I think will be in a better position 10 years from now than they are today. But there’s one that stands out from the rest.
Warren Buffett
It would be reckless to assume Warren Buffett’s going to be running Berkshire Hathaway (NYSE:BRK.B) 10 years from now. But I think the business will be in terrific shape.
There’s no way around the fact that Buffett’s skill and ability when it comes to doing deals will be impossible to replace. That means capital allocation will be much more difficult.
This is probably the biggest risk with Berkshire Hathaway over the next decade or so. But the assets the firm already has in place will continue to be extremely valuable.
Whether it’s insurance, railroads or utilities, the company’s subsidiaries have some unique advantages over their competitors. And I don’t see this changing in the next decade.
Insurance
Everywhere I look around Berkshire’s subsidiaries, I see huge competitive advantages. And that starts with insurance – the company’s biggest operating division.
Berkshire earns a better return on the premiums it collects than other insurers. This is because it invests these into common stocks, rather than bonds.
Other insurers generally aren’t able to do this. Berkshire however, has so much capital that it can meet its statutory requirements while investing its premiums in the stock market.
Over time, this makes a huge difference to the investment returns an insurance operation can generate. And I don’t think it’s something that will expire when Buffett isn’t in charge.
Competitive advantages
Berkshire’s massive cash balance also helps its other big subsidiaries, such as its railroad. The big problem with the rail industry is that infrastructure costs a lot to maintain.
For most companies, this means significant amounts of debt. But Berkshire’s franchise benefits from a source of cash that’s readily available from the parent company.
Something similar’s true of the utilities sector. Electricity businesses are expensive to run and this is a challenge for firms that have shareholders who are looking for dividends.
Berkshire however, doesn’t need to take a dividend from its subsidiary. As a result, its utilities business can reinvest its cash into new opportunities in ways others can’t.
Diversification
It’s pretty certain I won’t just buy one stock for the next 10 years. In fact, I’d say it’s about as likely as Cathie Wood – rather than Greg Abel – being appointed as Buffett’s successor.
One big reason for this is diversification. I think this is important when it comes to building an investment portfolio and it doesn’t inevitably have to come at the expense of great results.
That said, owning the best insurance operation, the best railroad, and the best utilities business constitutes some diversification. And that’s what Berkshire Hathaway shares offer.
