One of the most remarkable accomplishments of legendary investor Warren Buffett is leading the American multinational conglomerate holding company Berkshire Hathaway. The company was founded in 1839 by Oliver Chance as a textile manufacturer and transitioned in 1965 to a large conglomerate under the leadership of Buffet and Charlie Munger. It has a global presence and has business interests across different sectors and industries. The conglomerate structure of the company makes it one of the most sought-after stocks in the United States stock market. This article explores and discusses the advantages and disadvantages of Berkshire Hathaway stock.
Is Berkshire Hathaway the Holy Grail of Value Investing: Pros and Cons of Berkshire Hathaway Stock
Pros: Berkshire Hathaway Stock Advantages
Berkshire Hathaway has a presence across different businesses in different industries and sectors. Insurance is its main area of operations and the premiums from this business are used as one of the main sources of capital for investing in other companies. It specifically owns several insurance and reinsurance companies in the U.S. and other countries.
The conglomerate also owns or has investments in energy companies, utilities, building products manufacturers, clothing manufacturers and retailers, media organizations, furniture manufacturers and retailers, and real estate developers and brokerage firms, among others. Below are the advantages of investing in Berkshire Hathaway stock:
• Class A or Class B Share Class: Berkshire Hathaway trades in the New York Stock Exchange under the ticker names BRK.A for its class A shares and BRK.B for its class B shares. The availability of these two share classes provides investors with an option to buy either shares with more voting rights or shares that are less expensive.
• Large-Cap Stock and Value Stock: The conglomerate is a large-cap stock and value stock. Its class B stock alone has a market cap of more than $890 billion. This is indicative of liquidity. Investing in Berkshire Hathaway is also suitable for individuals who adhere to the principles of value investing or want to build a portfolio of value stocks.
• Diverse Businesses and Investments: Another advantage of Berkshire Hathaway stock is that investing in it is somewhat akin to investing in a pooled equity fund from pooled fund products like exchange-traded funds, mutual funds, and unit investment trusts. This comes from its various business interests and diverse investment holdings.
• Established Corporate Governance: Berkshire Hathaway has earned a reputation for its organizational structure. The company follows a decentralized approach to management to empower its individual subsidiaries and promote swift decision-making. The structure can allow it to adapt quickly to changing market conditions or market trends.
• Possibilities of Expansion and Growth: The conglomerate sits on a large pile of cash and is able to raise capital further from its public listing and the profits from its businesses and holdings. This means that it has the financial resources to expand to other businesses in new and promising markets or focus on high-value technological investments.
Cons: Berkshire Hathaway Stock Disadvantages
Buffett has been at the helm of Berkshire Hathaway for several decades. His impending retirement has raised concerns over succession and leadership. The company has also struggled to make recent acquisition deals. It struggles with deploying its massive cash pile due to the absence of investment opportunities it deems suitable and profitable.
It is true that the conglomerate has a diversified portfolio of business but its investments tend to be concentrated in selected industries and companies. There are also regulatory risks that come from its overall organizational structure and the specific structures of its other businesses. Below are the disadvantages of investing in Berkshire Hathaway stock:
• Leadership and Direction Uncertainties: The conglomerate faces uncertainties about its future. The upcoming retirement of Buffett has raised concerns over its future leadership. Munger also passed away. Some investors fear that the future management would not be able to replicate the success under the leadership of Buffet and Munger.
• Diversification Drawbacks and Issues: Investing in a conglomerate with diverse holdings runs the risk of negating the gains from better-performing businesses and investments due to the impact of poorer-performing businesses and investments. Berkshire Hathaway also concentrates most of its stake on insurance companies and big tech like Apple
• Possible Limited Growth Opportunities: Another disadvantage of Berkshire Hathaway stock is that it is not ideal for growth investing or those who are building a portfolio of growth stocks. Remember that it is a large-cap value stock. There is limited room for growth since it is struggling to find new businesses to acquire or companies to invest in.
• Trades Shares at Relatively Higher Price: The stock price of the conglomerate has traded around $300 to $400 per share from 2022 to 2024. This is considerably more expensive than the stock prices of large-cap companies with better growth opportunities like Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla.
• Does Not Trade Dividend-Paying Shares: It is also worth noting that Berkshire Hathaway stock is not a dividend stock. This can be a disadvantage and a deal-breaker for some investors who are building an income-generating investment portfolio or who want to invest in stocks that can provide them with a passive source of income.