The conglomerate has returned nearly 20% annually since Buffett took over, but is it still a worthwhile buy today?
Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.91%) has been a tremendous stock for long-term investors. If someone were lucky enough to buy shares in the company when Buffett took over as CEO in 1965, their investment would've increased 24,000 times over. In other words, a $100 investment would have turned into $2.4 million.
The conglomerate's 19.8% annualized returns over that time are unmatched, but it hasn't crushed the market to the same extent in recent decades. Is it a buy? Let's dive into the business to determine if Berkshire Hathaway is right for your portfolio.
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Berkshire Hathaway transformed from a failed textile business to a multinational conglomerate
In the 1960s, Berkshire Hathaway was a textile manufacturing business on its final legs. That's when Buffett purchased shares of the company that he believed were undervalued, which he planned to flip for a profit.
In 1964, Berkshire's management team made an offer to buy back Buffett's shares, and a few weeks later, it sent a written offer lower than what Buffett and the management team originally agreed to. In an act of revenge, Buffett decided not to sell, but rather acquire enough control of the company to fire the manager, who failed to honor their oral agreement.
Since taking over as CEO of Berkshire Hathaway in 1965, Buffett and his right-hand man, Charlie Munger, expanded Berkshire Hathaway into the wide-ranging conglomerate it is today. Today, Berkshire Hathaway owns companies in insurance, railroads, manufacturing, materials, and other cash-flow-producing businesses.
Insurance and other businesses power Berkshire's solid performance
Berkshire's vast array of companies provides the conglomerate with a steady stream of cash flows. Through the third quarter, the conglomerate's railroad, utilities, and energy businesses brought in $26.2 billion in revenue and around $1.9 billion in net income.
However, one of the more significant components of Berkshire Hathaway's success is its massive insurance operations. In 1967, Berkshire acquired National Indemnity. Since then, the conglomerate has added GEICO, General Re, Berkshire Hathaway Reinsurance, and Alleghany to its insurance operations. Through the third quarter of 2023, these businesses raked in $67 billion in total revenue and $10.6 billion in net income for Berkshire.
Buffett has told investors that insurance is "a very large chunk of Berkshire's value." What makes the insurance business appealing to Buffett and his team is the steady demand for the products, which grow during times of inflation or economic growth, and the robust cash flows they generate.
Additionally, insurers collect premiums upfront and pay later, operating a "collect-now, pay-later" model, as Buffett calls it. As a result, Berkshire consistently has a large pile of cash it can invest in stocks or bonds, which grows larger as its insurance companies continue to underwrite profitable policies.
Here's how Berkshire compares against the S&P 500
Berkshire Hathaway's long-term performance is stellar, but it hasn't necessarily crushed the market in the same way recently. Here's how the conglomerate has performed across various periods over the past few decades:
| 5 Years | 10 Years | 20 Years | 30 Years | |
|---|---|---|---|---|
| Berkshire Hathaway annualized returns | 12.7% | 12.4% | 9.7% | 12.5% |
| S&P 500 annualized returns | 14.5% | 12.1% | 9.5% | 10% |
Source: YCharts.
Berkshire Hathaway hasn't delivered market-crushing returns in recent decades. However, the company continues to perform in line with the S&P 500 index and is still beating the index over longer time frames.
What makes Berkshire an attractive stock for investors' portfolios is that it performs as well as the broader market, with significantly less volatility. Its cash-flow-positive businesses and a massive cash stockpile enable the company to ride out the ups and downs of the market well.
The Beta metric is one way to measure risk and shows how much a stock moves compared to a benchmark index like the S&P 500. Over the past decade, Berkshire's beta is 0.64, meaning it tends to experience much less volatility than the overall market while delivering similar returns.
BRK.A Beta (10Y) (Quarterly) data by YCharts
Is Berkshire Hathaway a buy?
Berkshire Hathaway is well known for its massive investment portfolio, managed by Buffett and his investing lieutenants, Ted Weschler and Todd Combs. While its investment portfolio provides a significant source of investment returns, its privately held companies also offer stability and cash flows that keep the business firing on all cylinders.
Considering its stellar cash flows, growing cash stockpile, and low volatility relative to the broader market, Berkshire Hathaway is an excellent stock for investors to buy today and hold long-term.
Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
