Berkshire Hathaway, Inc. (NYSE: BRK.B) is a conglomerate holding company that is perhaps best known for the presence of its iconic chief executive officer (CEO) Warren Buffett. Buffett, otherwise known as "The Oracle of Omaha," has been involved with the company for over five decades and is one of the wealthiest individuals in the world with a net worth of roughly $70 billion.
Berkshire Hathaway started as a textile manufacturing firm in which Buffett began acquiring shares early in his career, and in 1965, he took control of the company altogether. He soon began exiting the textile mill business and adding other businesses such as insurance, retail and media to Berkshire's overall portfolio of assets. Berkshire has continued acquiring stakes in financial services, utilities and manufacturing, and as of Nov. 10, 2015, has a market capitalization of $332 billion. Buffett has a reputation as one of history's greatest investors, which makes Berkshire Hathaway stock coveted among other investors.
Berkshire Hathaway is not a traditional company; instead it is a conglomerate of many different companies. The company exists as a series of stakes in publicly traded companies. Changes made by Buffett within the Berkshire portfolio can often move the stock price of the companies traded and are met with significant media coverage.
As of June 30, 2015, Berkshire Hathaway owned stakes in nearly 50 different companies. The three top holdings in the portfolio are Wells Fargo, Kraft Heinz and Coca-Cola. Keeping with the conservative nature of the portfolio, Berkshire Hathaway also counts Procter & Gamble; General Electric; Visa; and IBM among its largest holdings. Seven of Berkshire Hathaway's holdings represent stakes of 10% or more in the company.
Buffett's investment style is that of a long-term, buy-and-hold investor focused on value. He has long been known to focus his investments on companies that he knows and, as such, tends to avoid higher risk momentum names. His preference is well-established, slower-growth businesses. Buffett typically makes investments with plans to hold them for at least 10 years. One of his more popular quotes is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
As of November 2015, Berkshire's most recent transaction, the purchase of Precision Castparts for $235 per share in cash, wandered slightly from Buffett's traditional investment style. The company is typical of the type of businesses Buffett tends to favor. However, Berkshire paid a 21% premium per share to buy it, straying from Buffett's preference to get good value in his trades.
Buffett's conservative investment style and choices make for a conservative portfolio overall. The stock's beta of 0.25 as of Nov. 10, 2015, indicates portfolio volatility far below that of the broad S&P 500. The principle of risk and return suggests stocks with lower risk levels also provide lower return potential. While Berkshire Hathaway has essentially matched the S&P 500's performance over the five-year period ending Nov. 10, 2015, Berkshire has significantly outperformed the benchmark index over the 10- and 20-year time horizons. This performance demonstrates Buffett has been able to deliver above-average returns at below-average risk over the long term.
Income investors likely find the dividend yield as one of the only drawbacks of investing in Berkshire Hathaway stock. Berkshire has only paid a dividend once in 1967 and has not paid one since. For those considering Berkshire Hathaway as an individual retirement account (IRA) holding, this is less of a concern, as withdrawals from IRA accounts are generally not permitted until the individual reaches age 59.5
One of the most unusual features of Berkshire Hathaway stock is its stock price. As of Nov. 10, 2015, Berkshire Hathaway's Class A shares (NYSE: BRK.A) closed at $201,754. This puts even a single share purchase out of reach for many investors. Buffett has indicated his lack of desire to execute a stock split so the company attracts long-term investors as opposed to traders.
In 1996, Buffett partially conceded and issued a Class B block of shares to make his company more accessible to other investors. These shares made a 50-for-1 stock split in January 2010 and trade at $134.73 per share as of Nov. 10, 2015. There is essentially no difference in these shares outside of the stock price. Trading flexibility is the primary advantage of Berkshire Hathaway Class B shares.
The portfolio's composition of well-established mature businesses that can operate successfully in most market environments makes Berkshire Hathaway an investment that is appropriate for most IRA accounts. Buffett's style of investing for the long term aligns well with the long-term nature of IRA accounts.
Younger investors can use the stock as a core long-term holding for growing portfolios. Retirees will likely maintain a lower equity allocation in their portfolios overall with capital preservation being a primary consideration. However, equities are still needed in these portfolios to help stay ahead of inflation, and Berkshire Hathaway can be an ideal choice to fill out that part of the portfolio.
For most investors, the Class B shares are the only option when looking to add Berkshire Hathaway to an IRA. Generally, the maximum annual contribution to an IRA is $5,500 in 2015, although people who are 50 and older can contribute an additional $1,000. This means the Class A shares and their price of over $200,000 are not an option unless the investor has built up a sizable portfolio. The Class B shares should be accessible to all other investors.
Mutual funds and exchange-traded funds (ETFs) that contain broadly diversified portfolios of well-established, large-cap names are often recommended as core retirement portfolio holdings. Buying shares of Berkshire Hathaway is akin to buying shares of a large-cap value mutual fund and, therefore, these Class B shares make an ideal holding in retirement portfolios.