Berkshire Hathaway: An Unusual Stock, An Unusual Company

  +Follow August 29, 2013 9:24AM
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Berkshire Hathaway Inc. ($BRK-A) has quite an offbeat history. The $227 billion company began as a New England textile mill called Berkshire Fine Spinning Associates. Founded in 1839, the original Berkshire did reasonably well, going on to earn $29.5 million at its peak in 1948. Though an impressive feat for an industrial plant not one generation removed from the Depression, Berkshire wouldn’t become a world-class company making yards of cotton.

When an investor named Warren Buffett took control of the company in 1965, Berkshire shifted focus from making textiles, to making massive investments. As a holding company that emphasized growth, Berkshire would completely transition out of textiles in 1970 and eventually become one of the most successful – and idiosyncratic – companies on the American market.

The Berkshire Strategy

As would be expected from an investor with a successful, original investing strategy, Buffett is a guru, and a quote machine. Some of his maxims, like “If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes”and “Our favorite holding period is forever” have entered the lexicon as a rallying cry for value investors.

As this implies as well, as a holding company Berkshire plays the ultra-long game. Buffett has played it ths way pretty much since the beginning. After fully taking control of Berkshire in 1965, Buffett made one of his first major outside investments in American Express Company ($AXP), sinking $13 million into the struggling credit card company, and stuck with it, intending to ride it out.

His reasoning for sticking to it was simple. While AMEX's stock was reeling, he noticed when he went out in Omaha, people were still using their AMEX cards at the same rate. He reasoned then, in the long term, the company would ultimately be fine. And he was right. In 2013, Berkshire's 13.7 percent of American Express is worth roughly $10.64 billion.

Berkshire also first started buying into GEICO in 1976, taking total control in 1996. Other major investments like Coca-Cola Company (KO) and International Business Machines Corp (IBM) have likewise been Berkshire holdings for decades.

Berkshire is almost always in it for the long haul - and they expect the same commitment from their own investors.

Berkshire on Berkshire

Berkshire looks for the honest value of a company on the long term, and applies that ethos most dogmatically to itself, as evidenced in their stock.

As Berkshire’s prominence grew in the 1980s, pressure mounted on Buffett to split Berkshire's stock and attract outside speculation. In 1983, in his famous annual shareholder letter, Buffett outlined his reasoning why the company wouldn’t split. He explained that he wanted Berkshire’s stock to remain at its “intrinsic business value” and that splitting causes instability. He wrote:

If the holders of a company’s stock and/or the prospective buyers attracted to it are prone to make irrational or emotion- based decisions, some pretty silly stock prices are going to appear periodically. Manic-depressive personalities produce manic-depressive valuations. Such aberrations may help us in buying and selling the stocks of other companies.  But we think it is in both your interest and ours to minimize their occurrence in the market for Berkshire.

Though shareholders are, by definition, owners of the company, Buffet wrote that never splitting got investors into the mindset wherein they “keep their eyes focused on business results, not market prices… (and) think and act like business owners.”

Berkshire, then, operates like a mutual fund where the owners are playing with their own money. This engenders an incredible amount of confidence in the investor/owners,

Buffett’s commitment to these value investing principles have produced what is probably the strangest, yet successful stocks on the market.

A Strange Stock Indeed

A single Class-A voting share of Berkshire currently costs a cool $168.585.50,. That's roughly $166,000 a share more expensive than the second most expensive stock, Seabord Corp (SEB) at $2,704.25.

Berkshire Class A shares averages daily volume in the low hundreds, as most investors are, like Bershire wants, looking for stability.

This doesn't mean Berkshire as an investment is bulletproof. The stock tanked during the financial crisis, losing nearly a third of its value in 2008. But aside from that drop, and another minor dip after the tech bubble burst in the early 2000s, as an investment Berkshire has more or less risen steadily, and has proven a solid return for investors.

The stock has gained 2,144 percent since 1990. For comparison, in that same time frame the S&P 500 has only gained 379.64 percent.

Berkshire, however, has gone against this value investment Puritanism once. The company split their Class B shares, shares Buffett was hesitant to create in the first place. “Baby B” shares, like their parents, have performed well, gaining 446.76 since their 1996 creation to hit $112.20 a share.

For a long-term investor, quite a return indeed. Which is exactly what Buffett would want.

(image of Warren Bufett courtesy fo Flickr)

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  +Follow August 29, 2013 9:24AM
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