One of the largest publicly traded companies in the world, Berkshire Hathaway Inc. (NYSE: BRK.A) claimed an overall 751,113% gain during the 1964-2014 period in its 2014 letter to shareholders. On Aug. 14, 2014, Berkshire Hathaway's Class A shares reached the $200,000 price per share milestone, the largest dollar price per share for any stock trading in the United States.
An investment of $1,000 on Berkshire Hathaway's estimated 1964 stock price in 1964 would have generated over $9.98 million, excluding the 1967 dividend payment. An investment of $1,180 on Berkshire Hathaway's initial public offering (IPO) date of May 9, 1996 would have generated $6,294.50 after stock split.
The Berskhire Hathaway Story
Originally a New England textile company that Warren Buffett acquired, Berkshire Hathaway became an investment vehicle for Buffett's other investments, mostly in the insurance industry. Among its wholly owned subsidiaries, one of the most notable is GEICO, which provided coverage for over 22 million cars at the end of 2014.
While Berkshire Hathaway's insurance portfolio and list of wholly owned subsidiaries are a major driver of profits, the company also has holdings of major non-insurance corporations, including American Express, Coca-Cola, Johnson & Johnson and Visa.
Classes of Berkshire Stock
Trading on the New York Stock Exchange (NYSE), Berkshire's stock trades in two classes, A shares and B shares.
While Berkshire existed long before Buffett's takeover in 1964 (he began buying stock in 1962), the company considers 1964 as its starting year to measure corporate performance. The initial IPO from the Class A shares was before Buffett's arrival, but the cost per share is estimated at $19.
A strong believer in long-term value investing, Buffett did not allow any stock splits for the Class A shares. Trading at more than $22,000 per share in 1995, Berkshire's Class A shares were out of reach for most investors.
In response to the market's demands for higher accessibility and liquidity, on May 9, 1996, Berkshire issued Class B shares to allow average investors to include the company in their portfolios. A holder of one Class B share has 1/1,500th stock rights and 1/10,000th of the voting rights of a Class A shareholder. The holder of a Class A share has the right to convert it into 1,500 shares of Class B common stock, but this conversion privilege does not work in the opposite direction. Both Class A and B stockholders can attend the Berkshire Hathaway Annual Meeting, which is held on the first Saturday in May.
How Much Money You Would Have if You Had Invested in BRK.A and BRK.B
If you had invested $1,000 in Class A shares at the $19 price per share during Buffett's takeover in 1964, you would have owned 52 shares. At the closing price of BRK.A shares of $189,640 on Jan. 26, 2016, your 52 shares would have been worth $9,861,280, providing a theoretical 986,028% rate of return over a 52-year period. These calculations exclude the one-time dividend from 1967 because Berkshire's policy holds that it is more auspicious to allocate the company's earnings in other ways.
If you had invested $1,180 right after Berkshire Hathaway's IPO, assuming you could purchase that share of Berkshire at its IPO price of $1,180, you would have just one share. After Berkshire Hathaway Class B shares' 50-for-one stock split in Jan. 21, 2010, you would own 50 shares instead of one. At the closing price of $125.89 on Jan. 26, 2016, your investment would have been worth $6,294.50, providing a 433.43% rate of return over a 21-year period.
These are just hypothetical returns. Due to commission costs and liquidity issues, it is typically not feasible to buy just one share, for example. However, these are great examples of the power of value investing.
While Berkshire is much more diversified than companies that operate mainly in the insurance industry, the company has a considerable part of its portfolio in insurance companies. There is the risk that U.S. regulators may designate Berkshire as systemically important, forcing enhanced capital and liquidity restrictions.
In its August 2015 quarterly report, Buffett announced a contrarian bet (8.5 million shares) on cable operator Charter Communications. Given the imminent threat of cord cutting, this move puzzles some investors.
On the other hand, in the same quarterly report, it was revealed that Berkshire completely liquidated its shares of Phillips 66 and National Oilwell Varco in response to dropping oil prices. This move, combined with the company's ability to return around 20% per year on a book value basis since 1965 through a diverse portfolio, provides support that Berkshire may still continue to outperform the market in the future.