What Will Become of Berkshire Hathaway Beyond Buffett?

By Greg McFarlane AAA

For a rumpled octogenarian who lives relatively modestly, offering few ostentatious displays of his incomprehensible wealth, Warren Buffett sure gets more than his share of media exposure. The man who has become almost synonymous with the term “investor” remains robust, but at 83 is clearly somewhere in the fourth quarter of the game. He’s been at the helm of Omaha, Neb.-based Berkshire Hathaway Inc. (NYSE:BRK.A) since the height of Beatlemania, and has yet to publicly disclose a succession plan. (Then again, what’s the hurry? Buffett is still seven years younger than Berkshire’s vice-chairman.) Assuming that even Buffett’s $59 billion can’t buy him access to eternal life, what will happen to the company once he steps down? And what will that mean for investors?

The superlatives illustrating Berkshire Hathaway’s performance are too numerous to mention, but a 20% annual rate of return over the past 49 years is as good a place as any to start. A streak that long clearly can’t be attributed to random chance. But is it the system, or is it all the Oracle of Omaha’s doing?

Beyond Compare

Among major corporations, Berkshire Hathaway defies comparison. Bentonville, Ark.-based Wal-Mart Stores., Inc. (NYSE:WMT) is at least somewhat similar to Seattle's Costco Wholesale Corp. (Nasdaq:COST), as is Irving, Texas-based Exxon Mobil Corp. (NYSE:XOM) to San Ramon, Calif.-based Chevron Corp. (NYSE:CVX), and even Cupertino, Calif.-based Apple Inc. (Nasdaq:AAPL) to Redmond, Wash.'s Microsoft Corp. (Nasdaq:MSFT), sort of. But what to make of a company whose wholly owned subsidiaries are some of their respective industries’ largest players—in railroading, insurance, clothing, food & beverage, newspapers and more?

The short answer is that Berkshire Hathaway goes far beyond being just another conglomerate. When a company is that diverse, and that large, it becomes a de facto mutual fund. The Securities and Exchange Commission’s own definition of such (“a type of investment company that pools money from many investors and invests the money in stocks”…“redeemable” and sold continuously) describes Berkshire Hathaway as succinctly as anything does. It thus behooves investors, both large and small, to treat Berkshire Hathaway as the mutual fund it more or less is.

One sector that’s notoriously absent from Berkshire Hathaway’s broad portfolio is technology. Buffett’s unfamiliarity with tech has long made him reluctant to invest in it. On the one hand, that means he avoided MySpace, AOL Inc. (NYSE:AOL) and other temporarily ballyhooed companies that ended up becoming huge liabilities. But Berkshire Hathaway also missed out on Apple, Google Inc. (Nasdaq:GOOG) and many others when they were undervalued. Would a more progressive chairman not only have capitalized on such opportunities, but still enjoyed as many non-tech successes as Buffett has? It’s a rhetorical question, one that assumes the existence of an über-investor who could have reproduced all of Buffett’s hits while avoiding all of his misses. Such a person might be walking the planet, but we have no proof.

VIP-Only Shares

Berkshire Hathaway’s Class A stock, which is currently knocking on the door of $200,000 and has enriched its extremely limited number of stockholders in ways never previously imagined, is obviously not within reach of the ordinary investor. Issues worth less than 1% of a share of Berkshire Hathaway—which is to say, all of them—often split to lure more investors once those stocks’ prices become large and unwieldy. Meanwhile Berkshire has never split, Buffett maintaining that a high price discourages speculation and short-haul investing, even as that high price continues to gain the aforementioned annual 20% and sit well into six-digit territory. A few years ago the company did relent and eventually offer Class B stock (NYSE:BRK.B), which after splits of its own now trades at exactly 1/1,500 the value of the Class A stock. For those of us who don’t have $190,000 to rub together, is Class B stock—trading at about $127—the most prudent way to invest in Berkshire Hathaway? Or could you instead invest in an official mutual fund that does?

Of the 1,500 or so exchange-traded mutual funds in the United States, guess how many of them invest in Berkshire Hathaway Class A stock. No, lower. The answer is six. Furthermore, the ETF that Berkshire Hathaway Class A makes up the most of is the Vanguard S&P 500 ETF (NYSE Arca:VOO), and that a mere 0.12%. There are, however, 57 ETFs that hold Berkshire Hathaway Class B stock. Of those, the one that’s comprised more of BRK.B than any other is State Street Global Advisors’ Financial Select Sector SPDR (NYSE Arca:XLF). Fully 8.5% of the fund consists of Berkshire Class B.

So to invest in Berkshire Hathaway without directly investing in Berkshire Hathaway, your best bet is to buy into an ETF that tracks an index. An ETF whose performance has in fact approximated BRK.B over the last couple of years — the former has gained 52% in that time, the latter 55%.

Is that a wise idea? The BRK.B-heavy ETF has a lower barrier to entry, its roughly $22 price being about one-sixth of the Class B stock itself. But by taking a position in the ETF, 91.5% of your investment will be in something other than Berkshire Hathaway.

It’s important to remember that a staggering amount of Berkshire Hathaway’s $313 billion market capitalization is in companies that you can’t get a piece of otherwise because they’re privately held. Those include GEICO, Mars, Inc., Dairy Queen, H.J. Heinz Co. and BNSF Railway, which are all profitable, growing, internationally renowned companies that operate exclusively under the aegis of Berkshire Hathaway and are otherwise closed to investors. The company does hold large positions in publicly held companies: its self-styled “Big 4” are San Francisco's Wells Fargo & Co. (NYSE:WFC), of which it owns 9%; Armonk, N.Y.-based International Business Machines Corp. (NYSE:IBM), 6%; American Express Co. (NYSE:AXP), based in New York, 14%; and Atlanta's The Coca-Cola Co. (NYSE:KO), 9%. But the privately held companies make up the greater part of Berkshire’s intricate and meticulously assembled web of investments. And they’re responsible for most of those incredible annual returns.

The Bottom Line

If you invest in the ETF that’s deepest into Berkshire Hathaway, for every dollar that goes to Berkshire, the fund will invest in 10 or so in unrelated companies that could easily negate any future Berkshire gains. But if you have faith in Warren Buffett’s singular talent for finding value and committing resources, and his eventual successor’s ability to build on what Buffett’s done and continues to do, you should probably avoid the intermediate steps and go directly to the source.

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