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 $10 million, excluding the 1967 dividend payment.
- Berkshire Hathaway is Warren Buffet's holding company, investing in a diversified range of businesses.
- The company has issued two share classes, with A-shares trading at over $300,000 apiece - having never split.
- The B-shares are intended more for retail investors, at around $200 per share.
- Over the past 5 years, BRK.A has modestly outperformed the S&P 500 index.
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.
Never a Stock Split
Warren Buffett has never done a stock split of Berkshire Hathaway Class A shares (BRK-A), and he has flatly stated that Class A shares will never undergo a split. Buffett's reasoning for not doing a stock split of BRK.A is right in line with his basic investment philosophy.
Buffett's investment approach has always been that of a buy-and-hold investor focused on value and long-term growth – the polar opposite of an intraday trader. In line with this fundamental approach to investing, he believes that allowing the price of Berkshire Hathaway Class A shares to remain at a level that encourages purchasing the stock for the long term, rather than trading in and out of it, attracts the same type of investor as himself – that is, investors with an extended investment horizon and investing strategies.
Buffett later created Berkshire Hathaway Class B shares (BRK-B), which sell for a small fraction of the price of Class A shares, with the stated purpose of enabling retail investors to buy Berkshire Hathaway stock directly. Berkshire Hathaway did a split of the Class B shares in 2010, and not at the traditional two to one or three to one rate, but at a rate of 50 to one. While some might argue that this action is contradictory to Buffett's stated no-split policy on Class A shares, it is in fact logically right in line with his rationale for the creation of the Class B shares – to make (and by doing the split, to keep) Berkshire Hathaway stock affordable to smaller investors.
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.