Contemplating Purchasing Berkshire Hathaway Shares Right Now?
Berkshire Hathaway (-0.58% for BRK.A, -0.32% for BRK.B) is a name renowned in the investing world. Its impressive track record, under the guidance of its founder, Warren Buffett, has made it one of the most successful investments of all time. The question on many investors' minds is, with shares approaching the $500 mark, is it too late to jump on the Berkshire bandwagon? You might be surprised by the answer.
Crucial facts every Berkshire investor should know
Berkshire's stock has seen a compounded annual growth rate of approximately 20% for decades. A modest initial investment could have transformed into a substantial fortune over this period if invested in Berkshire shares. This striking fact has drawn countless investors to Berkshire. However, there are two essential things every investor should be aware of about the company today.
Firstly, Berkshire's colossal size poses a significant challenge in replicating its past success. This is not necessarily Berkshire's fault; it's just the mathematics of large numbers. As a company with a market cap of $1 trillion, Berkshire needs to generate an additional $1 trillion in value to double its share price. Contrast this with its value of $120 billion in February 2009, a figure it only needed to increase by $120 billion to double.
Finding suitable companies with enough potential to significantly impact Berkshire's overall value is challenging. Buffett himself acknowledged this challenge in his latest investor letter, stating that "there remain only a few companies in this country capable of truly moving the needle at Berkshire, and they have been exhaustively examined by us and others."
While Berkshire may still outperform the market, its era of 20% average annual returns for decades is likely over.
Secondly, the ever-present challenge of time cannot be overlooked. At 94, Warren Buffett is no spring chicken, and his closest advisor, Charlie Munger, who passed away last year at 99, is no longer with us. Investors might worry about the impact of Berkshire's leadership transition. However, Berkshire has certain features that should alleviate these concerns.
Why Berkshire Hathaway stock remains a buy today
Berkshire's enormous size might limit its potential for eye-popping returns in the coming decades, but as Buffett himself emphasized in his latest investor letter, "Berkshire is built to last." Berkshire's decentralized operating model, which allows its subsidiaries to operate as mostly independent businesses, is a key factor in this longevity. While Berkshire provides guidance, actual management is largely left to the respective teams running its diverse portfolio of wholly and partially owned businesses. These companies, handpicked by Buffett and his team, have a proven track record of success. As a result, Buffett still believes that Berkshire "should do a bit better" than the average American business.
Buffett's age concerns might be unwarranted as well. Over the years, Buffett has worked diligently to put a solid succession plan in place. Many of the individuals poised to lead Berkshire after Buffett's retirement have been with the company for decades and have contributed to its meteoric rise. In this way, Berkshire's legacy can continue beyond Buffett.
In conclusion, while Berkshire's dynamics may have shifted, and change might be imminent, particularly in the realm of leadership, Berkshire is designed to circumvent the problem of centralized power. Its value hinges on capable teams supporting quality businesses to think long-term, a structural advantage that is unlikely to fade even as Berkshire's market cap and executive team evolve over time.
Despite the challenges of replicating past success due to Berkshire's colossal size and the eventual transition of leadership, the company's massive compounded annual growth rate and decentralized operating model, overseen by long-term leaders, make Berkshire Hathaway a potential buy for investors looking at finance and investing opportunities.
The impressive track record of Berkshire's subsidiaries, chosen by Buffett and his team, and the decentralized management structure could ensure sustained performance, potentially outperforming the average American business, even as the company evolves and faces leadership changes.
