berkshire hathaway: forever stock no. 1
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Top 10 Forever Stocks | a series brought to you by Wyatt Investment Research ----------------------------------------------------------------------------------------- Forever Stock No. 1 is Berkshire Hathaway (NYSE: BRK.B). For this report, I researched a range of industries to bring you stocks that should hold up regardless of market conditions. To keep your portfolio diversified, I chose companies across several unrelated industries, including energy, healthcare, financials, technology, industrial goods and consumer staples. What’s more, several pay healthy dividends, a must in today’s low-interest-rate environment. These stocks are built to last, meaning you should hold onto them for the long haul. I’m sure you’ll be pleased with their performance for many years to come. -----------------------------------------------------------------------------------------TRANSCRIPT
Berkshire Hathaway (NYSE:BRK.B)
IN WARREN WE TRUST F O R E V E R S T O C K N O . 1
WORLD’S MOST SUCCESFUL INVESTOR
When asked to name the world's most successful investor, most people answer "Warren Buffett." And they're right. In fact, there's little room for debate.
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Warren Buffett didn't create an industry like personal computer software, as did his bridge partner Bill Gates. Nor did his eye for outstanding products lead him to build a consumer electronics behemoth like Steve Jobs. Warren Buffett's talent, instead, is an unrivaled ability for evaluating risk and understanding opportunity.
EVALUATING RISK AND OPPORTUNITY
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His prowess has made his holding company, Berkshire Hathaway, one of the world's largest companies and it consistently lands Buffet on the Forbes list of world's wealthiest people.
Under Warren Buffett's leadership from 1965 through 2013, Berkshire Hathaway (NYSE:BRK.B) has seen its per-share book value increase at an annual rate of 19.7%.
Other talented money managers have been able to achieve annual returns of 20% from time to time, but not over such a long period. Indeed, no investment manager has even come close to rivaling Buffett's 48-year track record of nearly 20% annual gains, even though many claim to “invest like Buffett.” They may indeed invest like Buffet, but they can’t log returns like Buffet.
But the reason to buy Berkshire Hathaway today isn't solely because of Buffett. The reason to buy Berkshire is because of the compelling value of the stock and the great business that Buffett has built.
48 YEARS OF 20% ANNUAL GAINS
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The "founding" of Berkshire Hathaway can be traced back as far as 1839, when Oliver Chace established a textile manufacturing company – Valley Falls Company. In 1929, Valley Falls merged with Berkshire Cotton Manufacturing to form Berkshire Fine Spinning Associates. The company took its current name from the merger of Hathaway Manufacturing and Berkshire Fine Spinning in 1955.
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Warren Buffett began buying shares of the public company in 1962, believing it was an attractive value since the market capitalization of $18 million was well below the $22 million in shareholder equity.
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Berkshire Hathaway today bears very little resemblance to the New England textile firm of the 1960s. Once in control of Berkshire, Buffett began expanding into the insurance business. In the late 1960s and 1970s, he bought National Indemnity Insurance and took a stake in Government Employees Insurance Company (GEICO), which formed the core of the company's insurance operations that remain intact today.
INSURANCE EXPANSION
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Buffett was attracted to the insurance business in large part due to the "float" created by writing insurance policies. As you know, an insurance company writes policies and collects premiums. While some of those premiums are held in reserve to pay future claims, a portion of those funds are available for the insurance company to invest.
THE “ FLOAT ”
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Some insurance companies keep the funds in money market accounts or U.S. Treasuries, earning a tiny amount of interest. But not Warren Buffet.
WORLD’S MOST SUCCESFUL INVESTOR
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At Berkshire, Buffett has used this float to make investments for the company, viewing the float as cost-free capital. As long as the insurance business breaks even, the company has access to capital for investments without having to issue debt or borrow from a bank.
Berkshire's insurance operations today include General Re, BH Reinsurance and GEICO, which together turned an underwriting profit of $3.1 billion last year.
COST - FREE CAPITAL
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Over the years, Berkshire has seen its insurance float surge, making vast amounts of capital available for investment. In 2013 the float was $77.2 billion, a huge increase from the relatively humble 1970 float of $39 million. The company uses this insurance float to make investments in both public and private companies.
THE $ 77.2 BILLION FLOAT
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Today Berkshire owns
56 private businesses, including:
Dairy Queen
Fruit of the Loom
See's Candies
NetJets
The company also owns businesses that it describes as "Regulated, Capital-Intensive," including MidAmerican Energy (electricity, natural gas) and Burlington Northern Santa Fe railroad.
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In terms of publicly traded stocks, Berkshire owns positions in Coca-Cola (which Buffett believes will double its dividend in 10 years), Wells Fargo, American Express, Procter & Gamble, Kraft, Johnson & Johnson, ConocoPhillips, and Wal-Mart. The most recent additions were: Goldman Sachs and Liberty Global.
PUBLICLY TRADED STOCKS
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Berkshire doesn't pay dividends to its shareholders.
Instead, the company retains its earnings and invests the cash from operations in investments selected by Buffett and his partner, Charlie Munger.
Buffett and his team have the ability to understand the big picture of the economy and how it will affect various sectors and individual companies. They know how to evaluate financials better than anyone else, and are steadfast in their willingness to invest only in companies that they fully understand (a basic principle that many investors often overlook).
Unlike many blue chip companies,
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"Our best years ended in the early 1980s...Looking
forward, we hope to average several points better than the S&P - though that result is, of course, far from a sure thing. If we succeed in that aim, we will almost certainly produce better relative results in bad years for the stock market and suffer poorer results in strong markets."
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Berkshire’s past performance clearly makes the stock quite attractive. But Buffett is quite honest and realistic about what the future will hold, writing:
While the very best days may be in the rear view mirror for
Berkshire, having underperformed the S&P 500 over the past two years, I'm betting that the company will return to its index-beating prowess over the long term by providing exposure to a diversified basket of America's best privately held and publicly traded companies.
And for that reason, there isn't a better Buffett-style investment available today than Berkshire Hathaway itself. Don’t just trade like Buffet. Let Buffet trade for you.
A RETURN TO INDEX-BEATING PROWESS
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Ready for more?
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