An investor blessed with Nostradamus-like predictive powers who put money to work with Berkshire Hathaway (BRK.B:NYSE) in 1964 and held the shares until 2022 would have enjoyed a gargantuan overall gain of 3,787,464% in terms of per share market value, leaving the stellar 24,708% return from the S&P 500 index with dividends included for dust.

Under the direction of legendary investor Warren Buffett and his co-manager for six decades Charlie Munger, the company’s per-share market value grew at a compound annual rate of around 20% over that period compared with 10% per year for the S&P 500 index. 

But as the well-worn disclaimer goes, past performance is no guide to future returns. Following the death of Buffett’s long-term business partner Munger in late November 2023, a mere 33 days short of his 100th birthday, it is the future of Berkshire Hathaway, a beacon of investment management revered for its long-term strategy and high rate of return, that concerns investors now. 

Keith Ashworth-Lord, manager of the CFP SDL UK Buffettology Fund (BF0LDZ3) which uses Buffett’s name and pursues the quality-focused ‘Business Perspective Investing’ approach championed by the ‘Sage of Omaha’ and Munger, describes the latter’s death as ‘truly an epoch-making event’.

Why Berkshire Hathaway matters

An American multinational headquartered in Omaha, Nebraska, Berkshire Hathaway was founded in 1839 as a New England textile manufacturer but underwent a drastic restructuring into a conglomerate starting in the mid-1960s under the leadership of Buffett and Munger.

Today, this $800 billion cap’s main business and source of capital is insurance, from which it invests the float in a broad portfolio of subsidiaries and equity positions. Present-day Berkshire Hathaway is one of the largest companies in the US employing several hundred thousand people through its railroad, manufacturing, retailing, energy, confectionery and insurance businesses. Berkshire’s insurance brands include auto insurer GEICO and reinsurance firm Gen Re; its railroad interests include Burlington Northern Santa Fe (BNSF); utilities and energy interests include Berkshire Hathaway Energy (BHE), and its other businesses span everything from manufacturer Precision Castparts to housing company Clayton Homes, flooring distributor Shaw Industries, clothing brand Fruit of the Loom and iconic candy shops chain See’s, to give just a flavour.

Buffett’s corporate creation is ‘basically a microcosm of the US economy and that was one of the reasons why I decided to put Berkshire Hathaway, which was run by people that I liked and respected immensely, into Buffettology’, says Ashworth-Lord. ‘If you look at the operating businesses you’ve got the railroad in there, the power generation and distribution businesses, a whole host of manufacturing businesses in various nooks and crannies of the economy and the retail and consumer-facing businesses. And that’s aside from the fact that Berkshire is probably best known for its insurance activities, which provide all the nice moolah to invest.’

Oakglen’s Lamond explains that Berkshire Hathaway has amassed ‘a diversified portfolio of investments’ bringing exposure to technology, banking, insurance, communications, energy and consumer staples. ‘Over the last few decades, Berkshire has accumulated substantial positions in these companies which has ensured it has oversight of the management of these investments. This has ensured Berkshire has been able to influence how the companies have been run.’

And then of course there is Berkshire’s investment portfolio including its largest single holding, Apple (AAPL:NASDAQ) – Buffett has said Apple is ‘probably the best business I know in the world’ – as well as Bank of America (BAC:NYSE), American Express (AXP:NYSE), Coca-Cola (KO:NYSE) and Chevron (CVX:NYSE), market leaders with the economic ‘moats’ beloved by Buffett. Other positions include Kraft Heinz (KHZ:NASDAQ), Amazon (AMZN:NASDAQ), Diageo (DGE) and Chinese electric vehicle maker BYD (002594:SHE).

Through its National Indemnity subsidiary, Berkshire Hathaway also has interests in five Japanese trading firms, namely Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, the biggest of Japan’s so-called ‘sogo-shosha’ or general trading companies. Buffett has likened this quintet to Berkshire Hathaway itself, since they have diversified portfolios with long-term investments and a focus on value and cash flow.

Munger had been Buffett’s right-hand man for six decades, during which they forged their reputation as the world’s supreme investors. It was Munger who steered Buffett away from what he had learned from Ben Graham, buying dirt-cheap ‘cigar butt’ shares with a view to selling at a fair value, and towards buying quality businesses at fair prices and then holding them for the very long term. Munger also earned the nickname ‘the Abominable No-Man’ for his capacity to correct and occasionally contradict Buffett, so his influence on the ‘Oracle of Omaha’ shouldn’t be understated.

But the big question on everyone’s lips is how Munger’s passing might change Berkshire Hathaway and the way it is managed. After all, Buffett is now 93, a ripe old age for a chief executive, and as the world’s greatest living investor recently conceded: ‘I feel good, but fully realise I am playing in extra innings.’

THINKING THE UNTHINKABLE – BERKSHIRE BEYOND BUFFETT

Ashworth-Lord’s take is that ‘nothing much will change, at least in the medium term. The culture of long-termism and shareholders-as-owners is so embedded.

‘It is in the company’s DNA,’ he says. His main worry is ‘the toll it might take personally on Warren, who must feel bereft’. In terms of the future beyond the Buffett era, Ashworth-Lord stresses that plans are in place for Howard Buffett, one of the great man’s sons, to become the non-executive chairman with Greg Abel, currently the head of Berkshire’s energy business, to run the operating business, and Ajit Jain to oversee the insurance operations. Tod Combs and Ted Weschler will continue as investment managers of Berkshire’s portfolio of marketable securities.

Abel is seen as the next Berkshire Hathaway chief executive, concurs Nick Brind, co-manager of investment trust Polar Capital Global Financials (PCFT), adding: ‘It is almost impossible to imagine Berkshire Hathaway after Buffett has gone but we would not expect any major changes to the way the business is run. The management of the investment portfolio is less clear albeit it is assumed that Ted Weschler and Tod Combs who currently manage a not insignificant percentage of the portfolio will be heavily involved.’

Also weighing in is Will Lamond, investment director at Oakglen Wealth. ‘Greg Abel is expected to take over the reins at Berkshire when Buffett finally stands down,’ Lamond informs Shares. ‘The Sage of Omaha was recently quoted in an interview with CNBC that Abel, “Does all the work and I take the bows – it’s exactly what I wanted.” The more pressing question is how and who will Abel be supported by in his role, and will there be another Charlie Munger-type figure?’

Like Ashworth-Lord, Lamond would be surprised to see many changes in how Berkshire Hathaway is run or how it invests. ‘The management team have all been handpicked by Buffett and the late Munger and have been in place for several years. I suppose the best way of looking at it, is if it isn’t broke, why try to fix it?’

COULD BUFFETT DO ANOTHER BIG DEAL?

At the last count, Berkshire Hathaway was sitting on a record $157 billion cash pile thanks to the mountains of cash generated by its operating businesses and following investment portfolio share sales. Given the conglomerate’s formidable firepower for acquisitions, might Buffett, who remains highly active for a man of his years, have one big deal left in him?

Could potential targets include Marmite-to-Magnum ice cream maker Unilever (ULVR) for instance? After all, back in 2017 Buffett was involved in the ultimately aborted bid for the FTSE 100 group from Kraft Heinz (KHC:NASDAQ). Or might Berkshire be interested in buying Diageo (DGE), the Johnnie Walker maker whose shares are currently nursing a profit warning-induced hangover?

Lamond says the enormous cash pile ‘has been well reported and in certain investment circles has been a detractor to the investment case for Berkshire. One would be foolhardy to totally discount a mega deal being struck but it is more likely Berkshire will continue to accumulate positions in companies such as Occidental Petroleum (OXY:NYSE), which remain underappreciated by the market. Also, Berkshire has a progressive share buyback program in place that allows management to buy back shares if the company trades below its internally set intrinsic value.’

Polar Capital’s Brind says: ‘A sustained downturn that is of sufficient duration to allow Buffett to deploy the cash in supporting or acquiring a decent sized business would make it much more likely but even during the financial crisis there was no one single huge deal as it was spread across a number of businesses. Having said that it was shortly followed by the acquisition of BNSF in 2009/10 so you never know.’

Ashworth-Lord insists Buffett won’t be rushed into anything and it is a case of ‘finding a deal that is big enough to move the dial and comes at a price that makes business sense for Buffett.

‘I can tell you from experience that he does not overpay. But if a deal does present itself, I’ve no doubt whatsoever he will do it.’

The general consensus on Berkshire Hathaway is that the shares could plunge when Buffett finally shakes off his mortal coil. Yet Ashworth-Lord doesn’t think the price will crater: ‘You’ll have the venture capitalists swarming round it like flies round a honeypot. But if Berkshire Hathaway were to tank, look at all that lovely cash on the balance sheet to start buying back shares. The company could mount a massive share buyback at a knockdown price and if that were to come to pass, it could well be Buffett’s best-ever deal from beyond the grave.’

How to buy Berkshire Hathaway

Berkshire Hathaway is a stock with defensive attractions given its ownership of large insurance businesses able to offset its more economically-sensitive businesses. And as Brind points out, the company is rated AA by S&P and Aa2 by Moody’s, reflecting the strength of its balance sheet.

Analysts at Morningstar believe that owing to its diversification and lower overall risk profile, Berkshire offers ‘one of the better risk-adjusted return profiles in the financial-services sector (and remains a generally solid candidate for downside protection during market sell-offs). We remain impressed by Berkshire’s ability in most years to generate high-single-to-double-digit growth in book value per share, comfortably above our estimate of its cost of capital.’

Ashworth-Lord assures Shares that Berkshire has been ‘a tremendously successful investment for the fund, because not only have we had quite a rise in local currency terms but we’ve had the benefit of cable.’ He’d be a happy holder beyond Buffett since the succession is ‘well in place and the culture is so ingrained in these guy that we don’t need to worry about them going off at a tangent’. Combs and Weschler have been ‘long bedded in as investment managers and been given more and more responsibility. I think you can see their impact in investments like Apple, which were probably their origination.’

Investors interested in buying the shares can, in theory, choose between Class A stock (BRK.A) and Class B stock (BRK.B). The main difference between the two classes is their price: as of 10 January 2024, the Class A shares were trading at $558,855 per share with the more affordable Class B shares changing hands for $367.70.

Class A is the original stock, known for its astronomical price per share, whereas the lower-priced Class B shares, issued in 1996 to enable smaller investors to nibble at the Berkshire pie, carries lower voting rights.

The Class A shares can be converted into an equivalent amount of Class B shares any time a Class A shareholder wishes to do so. The conversion privilege does not exist in reverse. Class B shareholders can only convert their holdings to Class A by selling their Class B shares and then buying the equivalent in Class A.

Another option is to purchase exposure through funds and investment trusts. At 5.18% of the portfolio, the conglomerate is the fourth biggest position in the CFP SDL UK Buffettology Fund (BF0LDZ3) and a top 10 holding in the BlackRock US Dynamic (B87XJQ6), Schroder US Equity Income Maximiser (B87XJQ6) and WS Canlife North American (B73N327) funds.

In the investment trusts space, JPMorgan American (JAM) holds the stock in its top 10, as does the Brind and George Barrow-managed Polar Capital Global Financials.

‘In terms of the valuation, we were guided by price to book value which is exactly what Warren does,’ adds Ashworth-Lord. ‘I always think it is worth looking at Berkshire Hathaway if it gets below a discount to book value of 10% to 15%. We’re not there at the moment, but if I was looking to buy more, I might just wait for a bad day on Wall Street because Berkshire is going to go down with it. You’ll get your opportunity.’ 

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