Berkshire had a market capitalisation of about US$520 billion in 2020. Today, its market value is around US$1.11 trillion ($1.44 trillion). Its stock has more than doubled over five years. Berkshire is now the world’s eighth-largest listed company. Six of those ahead of Nebraska-based conglomerate are from the Magnificent Seven tech giants. The other is Aramco, the Saudi oil behemoth.
Buffett’s rise as the world’s most watched investor is the stuff of legend. In 1942, the 11-year-old scion of an Omaha business family that ran one of the town’s main grocery stores made his first stock purchase — six shares of Cities Service, at US$38 a share — for himself and his sister and sold them for US$40. In his freshman year at New York’s Columbia University, 19-year-old Buffett had a portfolio of stocks worth over US$10,000. He made his first million soon after he turned 30. A million dollars back then would be worth around US$13 million today, adjusted for inflation. In 1965, he took control of struggling textile manufacturer Berkshire Hathaway and turned it into the world’s most storied investment firm.
Here is an example of the power of compounding. US$100 invested in Berkshire stock when Buffett took control of it would be worth US$10,858,900 today. A similar investment in the benchmark Standard & Poor’s 500 index would have grown to US$47,355. Berkshire’s shares have returned 19.8% annually while the S&P 500 has returned 10.4% annually in the same period. The S&P 500 returns include reinvested dividends. Berkshire, of course, pays no dividends, though it has bought back its own shares from time to time.
Buffett’s current net worth is around US$168 billion, making him the sixth-richest person on earth. He is not the world’s wealthiest because he is far too generous. SpaceX founder and electric vehicle giant Tesla Inc CEO Elon Musk has that title, with a current net worth of US$359 billion. Over the past 20 years, Buffett has given away US$56 billion worth of his Berkshire “A” shares to the Gates Foundation and four of his own family foundations. Donations to just those five foundations at today’s price would be worth over US$210 billion. He has generously donated to other causes in seven decades as an investor. 99% of Buffett’s wealth (including charity donations) was generated after he turned 65 in 1995.
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The Berkshire CEO learnt his craft from Columbia economics professor Benjamin Graham, “the father of value investing” and author of the seminal tome The Intelligent Investor.
“Buffett has always been good at visualising what others are often afraid to see,” says Bill Smead, the founder of Smead Capital in Phoenix, Arizona. In 1988, just months before the fall of the Berlin Wall, Berkshire bought more than US$1 billion worth of Coca-Cola stock at 18 times earnings, he recalls. “He thought people all over the world who didn’t have access to Coke before would want it,” Smead says. “Great wealth is created when you buy a stock that is out of favour or see something that no one sees.”
The Coca-Cola stake is now worth US$28.9 billion and earns annual dividends of just under US$1 billion. Berkshire has not sold a single share of Coca-Cola in the 37 years since it first purchased them. Coca-Cola’s aggressive share buybacks over the years have helped increase Berkshire’s stake in the firm to 9.7%. Known for his folksy wisdom on investing, Buffett “never chases fads or the hottest stocks and is one of the most disciplined ‘buy and hold’ value investors there is”, says Smead.
Apple bounty
Buffett’s biggest investment was iPhone maker Apple Inc. Berkshire had famously avoided investing in technology because Buffett and Munger thought they did not understand it. Around the time billionaire Carl Icahn was exiting his US$4.77 billion stake in Apple in 2015, Berkshire began buying shares in the firm, which makes iPhones, iPads, Apple Watches and Mac computers. Years later, Buffett began buying the shares only after he was convinced that it was really “a consumer products company with extremely loyal customers”. Berkshire splurged over US$34 billion on Apple shares.
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That investment grew to more than US$176 billion, or a 5.7% stake in Apple, before he started selling them. At one point, the iPhone maker made up more than half of Berkshire’s total stock portfolio. Buffett said last year he had to trim his positions in Apple and Bank of America Corp, mainly for tax reasons and to have a more balanced portfolio. Berkshire still owns US$75.1 billion worth of Apple shares, the biggest portion of its stock portfolio. Berkshire’s Apple foray will probably be remembered as the best investment anyone has ever made. “I’m somewhat embarrassed to say that [Apple CEO] Tim Cook has made Berkshire a lot more money than I’ve ever made [for] Berkshire Hathaway,” Buffett said last week.
In 2019, Berkshire began buying stakes in each of Japan’s five biggest trading houses, or sogo shoshas. By July 2020, it had paid a cool US$6 billion for a 5% stake in the five trading giants. He likes Japanese firms because “they very successfully operate in a manner somewhat similar to Berkshire itself”, Buffett said five years ago. It now owns 9.82% of Mitsui & Co, 9.67% of Mitsubishi Corp, 9.29% of Sumitomo Corp, 8.53% of Itochu Corp and 9.3% of Marubeni Corp, having raised its stakes since.
Berkshire also bought US$1.3 billion worth of shares, or a roughly 9.8% stake, in upmarket credit card firm American Express Co between 1991 and 1995. Those shares are now worth US$41.8 billion, and Berkshire currently has a 21.6% stake in AmEx without having purchased any new shares or reinvested any of its dividends. Share buybacks have helped more than double Berkshire’s stake in AmEx over 30 years.
The biggest part of Berkshire are its wholly-owned insurance subsidiaries that generate 36% of its total revenues and have 21% gross margin; BNSF, the largest freight railroad in the US which makes up over 7% of its revenues and has 28% margins, Berkshire Energy which accounts for 8% of revenues and Pilot Travel Centers, a large North American chain of truck stops which accounts for 12% of its revenues. Berkshire also owns manufacturing, retailing and services businesses, including NetJets, which sells fractional ownership shares in private jets.
Not everything that Buffett touches turns to gold, however. There have been plenty of duds, but when he is wrong, he quickly sells his dogs and moves on. In 2011, he invested in the former tech giant IBM, his first tech stock. Within two years, he had dumped all his IBM shares, taking a US$2 billion hit.
A few other large deals that have not worked out include the takeover of the former Kraft Heinz in a joint venture with Brazilian private equity group 3g Capital. Another one is Occidental Petroleum Corp. Berkshire owns 28.2% of the company, for which it paid US$12.4 billion. It also owns US$8.5 billion of Occidental’s preferred stock and warrants to purchase additional shares. Plummeting oil prices have hit oil stocks hard. “There’s never just one cockroach in the kitchen when you start looking around,” Buffett remarked in August 2017 when more dirt appeared in Wells Fargo’s cross-selling scandal, involving bank employees opening millions of fraudulent accounts without customer knowledge or consent to meet its aggressive sales goals.
The nonagenarian investor’s story “is a study in the logic and discipline of understanding future value”, notes a report by management consultancy McKinsey & Co. “Buffett typically doesn’t invest in opportunities in which he can’t reasonably estimate future value — there are no social-media companies or cryptocurrency ventures in his portfolio.”
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Instead, he banks on businesses that have steady cash flows and will generate high returns and low risk. Buffett’s theory that the quality of a company’s senior leadership can signal whether the business would be a good investment has been proven time and time again, the McKinsey report says. As Buffett once explained to shareholders: “See how [managers] treat themselves versus how they treat the shareholders … The poor managers also turn out to be the ones who really didn’t think that much about the shareholders. The two often go hand in hand.”
What makes Buffett and Berkshire so different from other great investing legends? For one thing, he made deft use of the “float” from Berkshire’s vast insurance businesses. Former chief investment officer of Pimco and “bond king” Bill Gross said last week: “His insurance holdings, which, by their structure, allowed for the investment of premiums at a near-zero cost into higher-returning assets such as Coca-Cola, American Express and Apple; and in so doing, he created a spread which over time led to billions and the recognition not just as a stock picker but as a financial wizard.”
Another way to look at Berkshire and Buffett is to compare them to contemporaries. Berkshire is not a hedge fund, mutual fund or exchange-traded fund or any other conventional investment vehicle. “It charges no management fees that would subtract from its returns and no performance-incentive fees that would encourage excessive risk-taking,” veteran investing columnist Jason Zweig noted recently in a Wall Street Journal column. “Berkshire’s only cash flows are internal. Money comes in from, or goes out to, the assets it owns. Cash can’t come pouring in from new investors, or get yanked out by fleeing investors, at the worst possible times — because you can invest in Berkshire only by buying shares from someone else in the secondary market.”
In Abel hands
Buffett once described Berkshire as his “painting”. Over the past 60 years, that canvas has expanded into a giant mural of sorts, each investment almost a deliberate brushstroke. Over the past year, the sale of stakes has increased Berkshire’s net cash position to more than US$348 billion. If you were wondering why Buffett was raising so much cash, he gave us the answer last week. He is leaving a ton of cash to his successor to manage and grow.
Known for his tireless work ethic and analytical approach, Abel will not be the next Buffett. No one wants him to be. Sixty years after Buffett began transforming Berkshire, Abel’s job will be to allocate capital efficiently as he remakes the conglomerate in his own mould in an era in which the use of artificial intelligence, software and quantum computing, rather than things like insurance float, will be the differentiating factor. The new CEO’s task will be to grow the incredible compounding machine that Buffett and Munger set up and painstakingly built — and write the next great chapter in the Berkshire story.
Assif Shameen is a technology and business writer based in North America
