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Berkshire Hathaway, the multinational conglomerate holding company founded by Warren Buffett in 1965, has a long history of outperforming the market. Its decentralized business model, diverse business mix, strong balance sheet, and substantial liquidity make it well-suited for weathering economic downturns, while its long-term investment strategy and insurance operations have helped it generate high-single- to double-digit growth in book value per share. UBS predicts that Berkshire Hathaway will outperform the market in a potential downturn in 2023, making it an attractive long-term investment for shareholders. However, governance issues and the need for succession planning are concerns to be aware of.
Introduction
Berkshire Hathaway is a multinational conglomerate holding company, founded by Warren Buffett in 1965. The company has become one of the most successful and respected in the world, with a market capitalization of over $700 billion. Berkshire Hathaway is known for its decentralized business model, diverse business mix, and strong balance sheet. In recent news, 53.2% of professional investors and 54.4% of retail investors expect Berkshire Hathaway to outperform the US market over the next five years. This article will explore the factors that contribute to Berkshire Hathaway's history of outperforming the market and provide advice for shareholders on how to make the most of their investment in the company.
Berkshire Hathaway's Business Model
Berkshire Hathaway's decentralized business model is one of the key factors that contribute to its success. The company owns a diverse range of subsidiaries, including GEICO, Dairy Queen, Fruit of the Loom, and Duracell. Each subsidiary operates independently, with its own management team and corporate culture. This model allows Berkshire Hathaway to avoid the bureaucracy and inefficiencies that can arise in a centralized organization. It also allows the company to take advantage of the expertise and innovation of its subsidiaries.
In addition to its decentralized business model, Berkshire Hathaway is also known for its long-term investment strategy. The company invests in businesses that have a strong competitive advantage, a proven track record of success, and a management team that is aligned with Berkshire Hathaway's values. Warren Buffett has famously said that he invests in businesses that he understands and that have a "moat" around them, meaning they have a sustainable competitive advantage that protects them from competitors.
Diversification and Balance Sheet Strength
Berkshire Hathaway's diverse business mix is another factor that contributes to its success. The company operates in a wide range of industries, including insurance, energy, manufacturing, and retail. This diversification helps the company weather economic downturns, as some industries may perform better than others during a recession. For example, during the 2008 financial crisis, Berkshire Hathaway's insurance operations helped offset losses in other areas of the company.
In addition to its diverse business mix, Berkshire Hathaway has a strong balance sheet and substantial liquidity. The company has a AAA credit rating, which is the highest possible rating and indicates a low risk of default. This rating allows the company to borrow money at low interest rates, which it can then use to invest in new businesses or make acquisitions. Berkshire Hathaway also has a substantial amount of cash on hand, which it can use to make strategic investments or weather economic downturns.
Berkshire Hathaway's Insurance Operations
Berkshire Hathaway's insurance operations account for about 25% of its pretax earnings and generate low-cost float. Float is the amount of money that an insurance company holds in premiums before it pays out claims. Berkshire Hathaway's insurance subsidiaries, including GEICO and National Indemnity Company, generate a significant amount of float, which the company can then invest in other businesses. This allows Berkshire Hathaway to make long-term investments without having to rely on external financing.
In addition to generating low-cost float, Berkshire Hathaway's insurance operations also provide the company with valuable data and insights. The company has access to a vast amount of information on risks and claims, which it can use to make informed decisions about its other businesses. This gives Berkshire Hathaway a competitive advantage over other companies that do not have access to this data.
Berkshire Hathaway's Performance in Past Recessions
Berkshire Hathaway has a history of outperforming the market in past economic downturns. During the 1990 recession, Berkshire Hathaway's A shares gained 19% while the S&P 500 gained only 10%. During the 2001 recession, Berkshire Hathaway's shares saw a 12% return while the S&P 500 saw a 15% loss. And during the 2008 financial crisis, Berkshire Hathaway's shares lost 24% in value while the S&P 500 tanked by 37%.
The company's strong performance in past economic downturns can be attributed to its diverse business mix, strong balance sheet, and substantial liquidity. Berkshire Hathaway's insurance operations also played a key role in its outperformance, as they helped offset losses in other areas of the company. Additionally, the company's long-term investment strategy allowed it to take advantage of opportunities that arose during the downturns.
UBS Predictions and Price Targets
UBS predicts that Berkshire Hathaway will outperform the market in a potential downturn in 2023. The conglomerate's strong performance in previous economic downturns is attributed to its diverse business mix, strong balance sheet, and substantial liquidity. UBS gives a 12-month price target for Berkshire Hathaway's class B shares of $362, roughly 10% higher than Friday's closing price of around $325.
Berkshire Hathaway's Sensitivity to Economic Slowdowns
Berkshire Hathaway's oil and gas investments and the general health of its financials make it "insensitive" to an economic slowdown. The company's energy business, which includes the BNSF Railway and Berkshire Hathaway Energy, generates a significant amount of revenue and cash flow. Additionally, the company's strong balance sheet and substantial liquidity allow it to weather economic downturns without having to rely on external financing.
Governance Issues
Berkshire Hathaway has generally scored lower on governance issues, as noted by Morningstar. The company's decentralized business model means that there is less oversight and control at the corporate level. Additionally, Warren Buffett has held the dual role of CEO and Chairman for many years, which has raised concerns about succession planning and transparency.
Conclusion for Shareholders of Berkshire Hathaway
In conclusion, Berkshire Hathaway's history of outperforming the market can be attributed to its decentralized business model, diverse business mix, strong balance sheet, and substantial liquidity. The company's insurance operations and long-term investment strategy have also played a key role in its success. UBS predicts that Berkshire Hathaway will continue to outperform the market in a potential downturn in 2023, and Morningstar's uncertainty rating for the company is low. However, shareholders should be aware of the company's lower scores on governance issues and the need for succession planning.
For shareholders of Berkshire Hathaway, the best way to make the most of their investment is to hold onto their shares for the long term. The company's long-term investment strategy and diverse business mix make it well-suited for investors with a long-term horizon. Additionally, investors should keep an eye on the company's financials and look for opportunities to buy shares when they are undervalued.
Conclusion
Berkshire Hathaway has a long history of outperforming the market, and its decentralized business model, diverse business mix, strong balance sheet, and substantial liquidity make it well-suited for weathering economic downturns. While the company has scored lower on governance issues, its long-term investment strategy and insurance operations have helped it generate high-single- to double-digit growth in book value per share. Investors looking for a stable, long-term investment should consider adding Berkshire Hathaway to their portfolio.
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