Let’s make one thing clear right from the get-go, this will not be a very popular post. It is not a feel-good article or one with a happy ending. This post is strictly business. The same way that your company will have no problem letting you go if they can increase their annual earnings-per-share by a penny. The same way that your landlord will start the eviction process the moment you’re late on a payment, even if you had five years of on-time payments. This post is black and white and written without emotion. Now that I’ve set the stage, let’s move on to see why I refuse to invest (directly) in one of America’s most profitable companies, Berkshire Hathaway.
By revenue, Berkshire Hathaway is the 2nd largest company in America. It is headquartered in Omaha, Nebraska and employs over 360,000 people worldwide. It is a global conglomerate with a great reputation and a history of success. Over the last five years shares of Berkshire Hathaway stock have achieved an annual rate of return of over 14%, doubling since late 2012. Take a look at Berkshire's rapid growth over the last twenty years.
There is no doubt that the company would have been a stellar investment over the last twenty years. Berkshire treats its employees well and is led by one of the best, if not the greatest, investors of all time, Warren Buffett. Class A shares of Berkshire are currently selling for over $275,000 and have never been split. Shares in the company are notorious for being very costly. One main reason for this is because Directors of the company believe a high stock price promotes long term investing rather than short term traders trying to make a quick buck. This logic is understandable (even though you can buy fractions of a share or purchase less costly class B shares) as most people will see the price per share and quickly look for something else to invest in. The price per share, however, is not the reason that I refuse to invest in Berkshire.
Moving markets is the ability to influence markets. Breaking it down, it’s the ability to make prices in an underlying asset fluctuate one way or the other. Generally, there are only two ways for an individual to move markets. One way is to buy or sell something in such a high volume that markets have no choice but to readjust the price (or to indicate that an investment or sale is imminent). The other way is to have enough clout in the industry to actually alter people’s opinion of something. Very few individuals can move markets. Warren Buffett is an exception. Warren has the unique ability to move markets through both methods listed above. With a net worth just north of $80B, Warren has enough capital at his disposal to change how companies are priced. Simply investing a large amount of capital in a company should drive the price up by itself. He also has such a reputation that when people find out that he invested in a company they will follow suit, thus amplifying any market move he created. The media and Wall Street have taken notice and coined this phenomenon as the “Buffett Effect.” Although not quite an arbitrage situation, as his investments are not risk-free, Warren is hard-pressed to make losing investments due to this. He is able to enter trades prior to the masses replicating his trade (and thus driving prices up) and then is able to exit the trade while others are still in it (keeping prices high).
As mentioned in the introduction, Berkshire Hathaway has a long history of success. The company owns many companies outright, including Dairy Queen, Geico, Johns Manville, and BNSF Railway. It also has large investments in other fortune 500 companies, including Apple, United Airlines, American Express, and Coca Cola. There is no doubt that the Oracle of Omaha (Buffett) is behind such strategic moves. At the age of 87, Warren Buffett is still in the prime of his career. He is still making superb investments and has a knack for finding undervalued companies. What worries me, however, is the amount of time that Warren can remain on top. According to data from the Social Security Administration, at age 87 a relatively healthy male can expect to live another five years. A morbid thought indeed, it is still an inevitable consequence of life. Upon Warren’s passing, or decreased cognitive ability to lead the company, there will be no more Buffett Effect, nor will there be a Berkshire Effect. Markets will no longer simply move just because the company invested in something. As stock prices are based upon future earnings, there will most likely be a sharp selloff causing Berkshire’s stock to plummet, as there will no longer be a Grandmaster sitting at the chess table. Buffett is synonymous with Berkshire Hathaway the same way that the iPhone is synonymous with Apple. The same way that the Google Search page is to Google. Picture one of those companies no longer having their biggest trademark and you can imagine what will happen to the stock in the future.
Warren has put together an impressive company of diversified investments, and the returns should continue to come in for a little while, even after his relinquishing of duties. At some point though the investments won’t be as meticulously timed as they are today, and the returns will slowly diminish. The public has been assured that whoever does act as Warren’s successor will be fully capable and highly qualified. The fact remains though that whoever does succeed Warren will not be Warren.
Greatest of all time
As a sports fan I like to use basketball references. Michael Jordan is considered by many to be the greatest basketball player to ever play the game. Having helped the Chicago Bulls win six championships over his career, MJ was dominant. When he retired from the game the Chicago Bulls assured everyone that they still had a star-studded team and would make a run at additional championships. But since Michael Jordan left the Bulls they have failed to win one championship in nearly twenty years. I liken this to the future of Berkshire once Warren is no longer leading the company. Granted that Berkshire may still be a solid company, I doubt that they will achieve the same type of success.
As mentioned earlier, this post is not one that will be popular. It’s simply meant to make people think about different types of risk that exist within any given investment. Hopefully the amount of time that Berkshire remains on top is measured in decades and not years. I, however, find that adding unwarranted risk to a portfolio is unnecessary, and that is why I choose to steer clear of Berkshire Hathaway.