September 26, 2008 - "Why everyone should own Berkshire Hathaway in their portfolio"
Summary: Everyone should own Warren Buffett's company, Berkshire Hathaway, in their portfolio. The Class B shares trade at around $4,500, but are well worth every dollar.
Everyone should own Berkshire Hathaway in their portfolio. While it may seem expensive at $4,500, price does not indicate how expensive something is. A $4,500 stock is not necessarily more expensive than a $10 stock. Why? A stock's price depends on the earnings that back it up. If the $10 stock can earn $0.50, it trades at 20 times its earnings. If Berkshire earns about $245 in earnings per share, it trades at roughly 18 times its earnings, therefore Berkshire is cheaper even though it costs so much more per share.
Second, while most mutual funds charge you a fee to have the portfolio manager invest your money, you can buy Warren Buffett's company and essentially have the world's greatest capital allocator and investor work for you for free. This leads me to my next point.
Warren Buffett can invest in deals that you do not have access to. He has roughly $40 billion of cash on his balance sheet, and the sheer amount of cash he has to invest with allows him to make deals that we as individual investors cannot make. The deal he did with Goldman Sachs could only be done with Warren Buffett. Moreover, one of the first people CEO's call when they need to sell their company or encounter trouble is Warren Buffett. He gets first dibs on deals many people never even get access to.
Finally and most importantly, Warren Buffett's company is one of the safest in the world. If you buy it on the dips, like when it was down 25% from it's highs earlier this year, you can make huge returns with very little risk. Although Warren Buffett may never get the huge outsized returns he had earlier in his career, he is far from done. Anytime people think Warren Buffett has lost his touch, he comes back and surprises people.
Let's look at his deals in the last two week where we put $15 billion dollars of shareholder money to work. First, he bought Constellation Energy Partners, a utility company trading at $100 per share for $26. Even if Constellation is worth half of it once was, he has immediately made his shareholders billions of dollars. Second, he negotiated a huge deal with Goldman Sachs. Goldman Sachs owes him a 10% interest rate on the 5 billion dollars Buffett lent them, and he has the option to buy another 5 billion dollars of stock at $115 per share. If he exercises that option today, he has already made money, Goldman is trading at $130 per share, and will certainly be worth much more money when the turmoil in the market clears.
The scariest part is if we thought Warren Buffett was a world class stock/equity investor, he is an even better bond investor, which is a market that has huge opportunities for skilled investors.
Disclosure: I own Berkshire Hathaway in my portfolio.
