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Berkshire Hathaway’s Golden Anniversary

For as long as I can remember, Berkshire Hathaway Type A shares have topped the list of the world's most expensive stocks. As you read this, the price of a single share stands at around $220,000 USD, the equivalent of 6 years' work at the average wage. On the occasion of the 50th anniversary of its creation, I'd like to take a look at the current situation.

Berkshire Hathaway is a conglomerate headed by Warren Buffet, the oracle of Omaha. The conglomerate has an impressive spectrum of activities "ranging from lollipops to jet airplanes", but operates mainly in the following sectors: insurance, textiles, energy and utilities distribution and financial products.

When Berkshire Hathaway came under Mr. Buffet's management in 1962, the company operated solely in the textile sector. The name Berkshire Hathaway derives from the merger of two companies: Hathaway Manufacturing Company and Berkshire Fine Spinning Associates.

The conglomerate is at the head of several insurance companies (their core business), including Geico, General Re and BH Reinsurance. These insurance companies alone generated profits of over 3 billion in the past year. Geico, which mainly offers automobile insurance, was one of Berkshire's most prolific acquisitions.

In the textile and retail sector, these include Fechheimer Brothers Company, Fruit of the Loom, H.H. Brown Shoe Group, Justin Brands and many others. In 2014, this group of Berkshire-owned companies posted a net profit of 4.47 billion.

Berkshire Hathaway Energy (BHE) and BNSF make up the company's 3rd main sector, energy and utilities distribution.

BHE accounts for over 6% of total U.S. wind energy, 7% of U.S. solar energy and 8% of U.S. natural gas consumption. Revenues for 2014 are estimated at over 5.5 billion USD.

Finally, the financial products sector includes Marmon, Clayton and XTRA, to name but a few. After-tax profits for 2014 amounted to USD 1.8 billion.

Among its main investments are the Big Four, comprising :

  • 7.8% in IBM
  • 9.2% in Coca-Cola
  • 14.8% in American Express
  • 9.4% in Wells Fargo

At first glance, these figures may seem insignificant, but think again: an increase of 1 tenth of a percent = 0.1%? in one of these four companies represents an increase in revenues of $50 million a year.

In addition, Berkshire has an option to buy shares in Bank of America. This option covers 700 million shares for a total of 5 billion, and can be exercised at any time between now and September 2021. To date, the fair value of these 700 million shares is in excess of 12.5 billion.

More recently, the conglomerate acquired 50% of Heinz, participated in Tim Horton's high-profile acquisition of Burger King, and is currently in the process of concluding an agreement with Procter & Gamble for the acquisition of Duracell.

Some interesting facts:

- A monumentally stupid decision over $0,125 :

Before acquiring control of Berkshire Hathaway, Warren Buffet only had a 7% stake in it, and was even trying to get rid of it to get out of the textile sector. Buffet was about to sell his shares to one of the company's major shareholders, Seabury Stanton. The agreed price was $11.50 a share, but when he received the purchase letter, the written price was $11,375. Offended, Buffet ignored the offer and proceeded to buy more Berkshire stock in order to gain control and subsequently fired Stanton.

Over the years Buffet regretted not having listened to his first instinct to sell the stocks at a profit while it was time and would end up, a few years later, getting rid of these stocks at a loss. Hence the name Berkshire Hathaway has remained to this day to remember the mistakes of the past.

- Over the last fifty years, the conglomerate has only made 3 investments at significant losses, 2 of which occurred in 1974-1975.

- Berkshire has chosen never to do a stock split for its type A share despite its high price (220,000 USD), the reason is simple: to reduce the volatility of the share and discourage speculation.

However, Berkshire has another type of Class B stock that trades around $145.

Conclusion to be drawn from the last 50 years:

Berkshire Hathaway attributes its success to diversified rather than safe investing:

"The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities.Treasuries, for example whose values have been tied to American currency.

That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.

That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. Any party that might have meaningful near-term needs for funds should keep appropriate sums in treasuries or insured bank deposits. For the great majority of investors, however, who can invest with a multi-decade horizon, should invest in widely-diversified stock portfolios."

- Annual Report 2014

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