Berkshire Hathaway (BRK.B)

" Price is what you pay, value is what you get"   

- Warren Buffett

Summary

• Berkshire can be viewed as the world largest hedge fund that continuously adjusts its portfolio into the right sectors and consistently generate solid cash flows every year

• Berkshire’s stock performance generates higher returns than the S&P 500 index, while bears less losses than the S&P 500 index during the crisis period

• Berkshire had extraordinary performances over the past 5 years, sales and earning growth rates both steady increased over time, 10.8% and 30%, respectively

Berkshire is a very well known holding company that has one of kind historical records outperforming the market. What amazed me is Berkshire’s business model, its insurance operation enable Berkshire to have sufficient cash position upfront with less than zero cost of capital (because of underwriting profit) to invest in undervalued companies that generate higher returns and cash flows back to Berkshire. Mr. Buffett and his talented team carefully invest in market leaders with wider economic moat that ensures their long-term success, and Mr. Buffet usually trust the original management teams so that they can continue navigating business to long-term directions. 

Mr. Buffett and his teams established 15 owner-related business principles that ensure management teams are carefully followed these wise guidelines. Instead of saying Berkshire has a portfolio of good talented people, it is better to say Berkshire has a portfolio of good skills that make sure that the entire company can go toward the right directions with right money management, assets management, investment management, operation management, strategy management and so forth.

According to Berkshire’s 2013 annual report, starting from 1965 to 2013, Berkshire has 19.7% of comp annual gain (per share book value) while S&P has 9.7% of comp annual gain. Also, if you buy $1 worth of BRK.B stock in 1965, you will have $6935.18 in 2013. S&P 500 index, however, would only give you $98.41 worth in 2013. In dot.com bubble (2001-2002), BRK.B had 5.7% and 32.1% spread compared to S&P 500. Moreover, in recent financial crisis (2007-2008), BRK.B had 5.5% and 27.4% spread compared to S&P 500.

In terms of Berkshire’s financial performance, Berkshire has consistent 18% and 8% of its operating margin and net profit margin, respectively.  In addition, its EPS comp annual growth over the past 5 years is around 30%. As a result, the company is in a very good shape and a good long-term investment to execute a buy-and-hold-forever strategy. I feel comfortable with their long-term perspective, and Berkshire’s cash positions are sufficient to handle any unexpected emergency event in the future.

Disclosure: 

I write this article myself, and express my own opinions. I do not have any business relationship with any company whose stock is mentioned in the article. Any investor should do proper research or seek advice from a broker or a financial adviser before making any investment decisions.