Berkshire Hathaway: Very good investment opportunity!

Miguel Braun · Mar 30 2022 · 8 min read

What is Berkshire Hathaway?

Berkshire Hathaway is the company of the world's most famous investor, Warren Buffett. It started as a textile company, but Warren later decided to take that structure and turn it into a holding of companies in various sectors. This way, Warren dedicated himself to raising capital from investors to then buy businesses with that money (mainly shares of other companies), until becoming, years ago, a collection of top-tier businesses.

Berkshire's success comes from the method used by its directors, Warren Buffett and Charlie Munger, to carefully select which companies to buy. They follow a doctrine called value investing, which consists of buying stocks only when their price is below what they consider the company's intrinsic value.

Berkshire differs from traditional conglomerates because they generally don't aim to control the business they buy. They focus on buying good companies with very good management at a reasonable price, and then in many cases they try to establish the right incentives so that directors, employees and shareholders of those companies want to keep growing or doing things well.

The power of share buybacks:

Berkshire does a lot of buybacks of its own shares. In 2020 alone they bought back 5.2% of the company's shares, meaning if you were a shareholder, you automatically came to own 5.48% more than you had before without doing anything at all.

One of Berkshire's biggest investments is in Apple, which also buys back its own shares with liquid and realized earnings. When they finished the Apple share purchase process in 2018, Berkshire owned 5.2% of Apple. The cost of buying all those shares was $36 billion. Since then, they've collected $775 million annual dividend and also in 2020 they sold a portion of their Apple investment (taking profits) for $11 billion.

A surprising fact:

Berkshire owns (directly or indirectly) the largest amount of assets classified as property, plant and equipment in all of the United States, worth $158 billion. Berkshire owns 91% of an energy company (Berkshire Hathaway Energy) and 100% of a railway company (Burlington Northern & Santa Fe Railroad or BNSF) that runs through 28 states and moves about 15% of all merchandise imported in the United States. Since 2010 when they bought it, the railroad company has paid them more than $42 billion in dividends.

The Big Four: What are Berkshire's top 4 businesses?

Let's see what the return of Berkshire Hathaway's stock was compared to the SPY from 1965 to 2021. Berkshire had a return of 3,641,613% while the SPY rose 30,209%... in both cases excluding dividends paid.

That is: if you invested $1 in Berkshire Hathaway in 1965 today you'd have $36,416, while if you invested in the SPY today you'd have $302. CRAZY the difference.

Berkshire currently trades with past 2021 earnings at a 9x earnings ratio, against a price/earnings of 26 that the SPY has. As we observed before, buying Berkshire was a vastly superior investment over the past 60 years than buying the SPY.

The company's market cap + net financial debt (Enterprise Value) doesn't even trade above the value of Berkshire's assets. That is, you buy Berkshire shares at a price less than the value of its assets on the balance sheet. Additionally, they have very little debt and will continue with their share buyback program.

"BRK always has $20 billion or more in cash. It sounds crazy, never need anything like it, but some day in the next 100 years when the world stops again, we will be ready. [...] Be greedy when others are fearful and fearful when others are greedy."

Best of all, you can buy Berkshire shares from your local broker via cedears. You can buy in pesos and this way also hedge against USD cable rises.

Recommendation: Mega-strong BUY.

"Price is what you pay. Value is what you get". 03-30-22 - MB