Does it make financial sense to buy Berkshire Hathaway stock and let Warren Buffett and Charlie Munger manage your money? We evaluate Berkshire Hathaway’s people, investment process and performance to determine what to do.
In this episode you’ll learn:
- How to evaluate a money managers by focusing on people, process and performance.
- What is Berkshire Hathaway’s investment process and who is making the decisions.
- How has Berkshire Hathaway performed as a money manager.
- What are some concerns with having Berkshire Hathaway manage your money.
Show Notes
Berkshire Hathaway 2018 Annual Report and Shareholder Letter
Berkshire Hathaway 2013 Shareholder Letter
Warren Buffet Admits Overpaying for Kraft – Financial Times
Warren Buffett: I Overpaid for Kraft Heinz – Wall Street Journal
The Tao of Warren Buffet by Mary Buffett and David Clark
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Episode Summary
Host, David Stein, evaluates Warren Buffett’s Berkshire Hathaway stock by holding up the managerial system to the three Ps: People, Process, and Performance. While other factors certainly come into play when deciding who to invest with, David explains that these three tests create a substantial foundation for decision-making.
The Berkshire Hathaway stock has proved to be one of the most successful and expensive stocks in the U.S. Its founders, Warren Buffett and Charles Munger, are brilliant investors who have carried the capital of loyal contributors for decades. They love what they do and are good at it. But is it still worth hiring Buffett as your manager by investing in Berkshire stock?
Looking to the people of Berkshire Hathaway for answers
What can you learn about a money manager from the people involved in the process? Who is making the decisions regarding the securities? What is the culture of the team? The senior executives of Berkshire consist of Buffett and Munger. They recently added two members to their executive staff, but as far as the capital investment and stock acquisition decisions go, Buffett and Munger have control. This has worked quite well for the company, and while Buffett and Munger are more than competent, David points out that there is no plan for succession. What will happen when these two investing giants are no longer with us? They appear to not be training anyone to take over their positions, and that should be a red flag to those considering buying Berkshire stock with a long-term time horizon.
Analyzing Berkshire Hathaway’s two-pronged process
The process that Buffett and Munger take has always been clear and honest. They view their position as stewards of their shareholders’ capital. The two ways that they primarily go about doing that are through acquiring well-developed and promising businesses—often very large businesses—and through purchasing marketable securities. While they love the glowing possibilities that come from acquiring large businesses, they are becoming harder and harder to find at reasonable prices. Berkshire Hathaway has billions of dollars that must be managed and invested somewhere, and often large businesses aren’t available. Because of this, they will most likely have to focus on purchasing more and more marketable equities. To learn more about the ways their process has wildly succeeded and about some of the mistakes that have come out of it, listen to the whole episode!
Exploring the performance of Berkshire Hathaway
David explains that it is always important to look at the history of a stock and see how it has performed over time, as well as to look at the projected future path of the stock. The Berkshire Hathaway stock has returned 20.5% annualized compared the 9.7% for the S&P 500 Index over the past fifty-five years. While that may be wonderful, it is important to realize that the company is now much larger now, and as it becomes bigger, it will prove to be more difficult to allocate and acquire at the multi-billion dollar level. David did a study of how well the Berkshire stock outperforms the S&P 500 over the next 5, 10, 15, and 20 years. While it does outperform by a couple of percentage points at the 20 and 15-year marks, it underperforms for the 10-year.
Understanding Warren Buffett’s philosophy
In the end, David says he wouldn’t purchase Berkshire stock. Why? It is important to look at Buffett’s own advice found in his will. He doesn’t recommend his own stock. He instead advises diversification and investment in index funds. He says that, “The goal of the nonprofessional should not be to pick winners. Neither he nor his helpers can do that, but should rather be to own a cross section of businesses that in aggregate are bound to do well.” Understanding where you are at as an investor is important in making shareholding decisions. What are your goals? While the Berkshire stock has done tremendously well and has remained a stable investment, they have made some mistakes, and there are red flags to consider. Listen to the full episode for a more in-depth understanding of the Berkshire Hathaway stock and why David says he will be leaving it alone in pursuit of other investments.
Episode Chronology
- [00:19] Berkshire Hathaway as a money manager.
- [1:49] Looking at the people to determining who to hire as a money manager.
- [3:37] What is the succession plan of the founding partners?
- [5:57] Berkshire Hathaway’s process – a two-pronged approach.
- [11:49] Understanding the mistakes that Berkshire Hathaway has made.
- [16:18] Comparing the performance of Berkshire Hathaway to the SP 500.
- [20:29] Taking the red flags into consideration.
- [21:51] Warren Buffett’s investment philosophy.
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