If there’s one name that gets attention on Wall Street, it’s Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). It’s because the company he runs has performed so well over the long term that he’s been given the nickname “The Oracle of Omaha.” Some investors even try to model their investment decisions based on stocks in the Berkshire portfolio. Others take the easy route and simply buy Berkshire stock.
As exciting as it is to potentially profit from a living Wall Street legend, investors need to understand that Berkshire Hathaway is not a “normal” company and that its shares are better suited to a certain type of investor. They need to take a closer look at how stocks work before buying stocks.
Berkshire Hathaway has an incredible track record
Giving credit where credit is due, since the turn of the century, Berkshire Hathaway’s stock is up about 1,000%. This is an incredible performance considering that the S&P500 index, using SPDR S&P 500 Index ETF as a proxy, gained “only” 260% over the same period. Even if you reinvest the dividends, the S&P 500’s total return is only about 460%, still far behind Berkshire Hathaway, which pays no dividends at all.
There’s no doubt that Berkshire Hathaway’s outperformance has a lot to do with Buffett. The man has proven time and time again that he has a knack for finding great investment opportunities and the emotional strength to survive tough times. This has allowed the company he runs to benefit from the long-term growth of the companies in which he has invested.
But his real investing approach is a bit unusual. Buffett likes to invest in well-run companies when they are reasonably priced (or better yet, when they are unpopular). Then it lets the management teams of those companies do their jobs, only intervening if there is a reason to do so (like persistent poor performance). Otherwise, he’s pretty indifferent. This is true both for the companies Berkshire buys directly and for the stock investments it makes.
So, what exactly is Berkshire Hathaway?
Berkshire Hathaway is a conglomerate with a wide range of subsidiaries. She also has a collection of stock investments, in which she is only a significant shareholder in a given company. If you buy Berkshire Hathaway stock, you’re not really buying a specific company, but rather Warren Buffett’s approach to investing. This is clearly a good decision given past performance. But it may not be the right decision for all investors.
For example, if you like to dig into the details of the companies you own to fully understand how they work, well, you’ll encounter nothing but frustration at Berkshire Hathaway. Not only is Buffett notoriously secretive, but the list of companies the firm owns is enormous and incredibly diverse. For example, it owns a furniture retailer, a utility, a painting company, a railroad, a metal parts manufacturer, and a pipeline operator. Then there are the huge insurance companies it owns, including GEICO. There’s no rhyme or reason to the list of what Berkshire Hathaway owns, other than that Buffett liked them when he bought them. And Berkshire doesn’t actually provide much detail about most of the subsidiaries it owns.
Above the companies owned is the stock portfolio, which is also an eclectic list, but it can change quite quickly as Buffett and his team buy and sell stocks. Currently, the portfolio includes long-term securities like Coca-Cola And Chevron. But a recent release was Paramount Worldwide, an investment that Buffett described as a mistake in which he lost a lot of money. In other words, not everything he touches turns to gold, even if he has an excellent long-term investment track record. And because Berkshire buys and sells regularly, you won’t be able to accurately track the stock portfolio.
The important point to remember here is that you give up a huge amount of control when you buy Berkshire Hathaway stock. Essentially, you give your money to Buffett and his team and let them invest for you. It’s more like a mutual fund than a stock investment. If you like to take the lead in your portfolio, Berkshire Hathaway’s business model probably won’t make much sense for you.
Great company, but an acquired taste
It’s hard to argue with the success Berkshire Hathaway has clearly achieved, and it will likely be a great investment for many people. But you need to understand what you’re buying when you get in, otherwise you might find that it doesn’t work well with your own investment approach. And that’s the problem with Berkshire Hathaway: It’s so unique that many investors will find it difficult to hold – effectively necessitating handing over the investing reins to Buffett – even though the stock has performed so well on the long term.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Berkshire Hathaway and Chevron. The Motley Fool has a disclosure policy.
Berkshire Hathaway stock is great. Here’s why you shouldn’t buy it. was originally published by The Motley Fool