Berkshire Hathaway, Inc. (BRK.B) is a conglomerate holding company that is best known for its iconic chief executive officer, Warren Buffett. Otherwise known as "The Oracle of Omaha," Buffett has been building the company for more than five decades and is one of the wealthiest people in the world with a net worth of more than $87 billion in 2018, according to the annual Forbes list of the richest individuals.
Berkshire Hathaway started as a textile manufacturing firm in which Buffett began acquiring shares early in his career. By 1965, he had taken control of the company outright. He soon began exiting the textile mill business and adding businesses from other industries including insurance, retail and media to Berkshire's overall portfolio. Berkshire has continued acquiring stakes in financial services, utilities and manufacturing. His company had a market capitalization of just under $530 billion as of Nov. 2019.
Along the way, Buffett has built a reputation as one of history's greatest investors, which makes Berkshire Hathaway stock coveted by other investors.
The Berkshire Hathaway Portfolio
Berkshire Hathaway is not a traditional company. It is a conglomerate of many different companies and exists only as a collection of stakes in publicly traded companies. Changes made by Buffett in the Berkshire portfolio often move the stock prices of the companies traded and get significant media coverage.
The portfolio's top four holdings in 2018 included Apple, Bank of America, Coca-Cola, and Wells Fargo. The big stake in Apple was of particular interest to Buffett-watchers because he has been notoriously averse to investing in technology stocks. Other major holdings in 2018 included American Express, Kraft-Heinz, and U.S. Bancorp. Berkshire Hathaway's top five holdings make up nearly 65% of its portfolio.
Warren Buffett's Management Style
Buffett is a long-term, buy-and-hold investor focused on value. He has long been known to focus his investments on companies that he knows. As such, he tends to avoid higher risk momentum names. His preference is for 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.”
One of his more recent transactions, the purchase of Precision Castparts for $235 per share in cash in 2015, diverged 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, departing from Buffett's preference for good value in his trades.
Berkshire Hathaway's Performance
Buffett's investment style and choices make for a conservative portfolio overall, with less than average volatility. The principle of risk and return suggests stocks with lower risk levels also provide lower return potential.
While Berkshire Hathaway essentially matched the S&P 500's performance over the five-year period ending Nov. 21, 2019, Berkshire 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 lack of a 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 59½.
The Two Share Price Classes
One of the most unusual features of Berkshire Hathaway stock is its stock price. It never splits. On Nov. 21, 2019, Berkshire Hathaway's Class A shares (BRK.A) closed at $325,502 per share. This puts even a single share purchase out of reach of many investors. Buffett has made it clear that he prefers to attract long-term investors as opposed to traders.
In 1996, Buffett partially conceded, issuing a Class B block of shares to make his company more accessible. These shares made a 50-for-1 stock split in January 2010 and trade at $216.84 per share as of Nov. 21, 2019. 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.
Does Berkshire Hathaway Fit in an IRA Account?
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.
The Bottom Line
For most investors, the Class B shares are the only option when looking to add Berkshire Hathaway to an IRA. The maximum annual contribution to an IRA is $6,000 a year for 2019 and 2020, although people who are 50 and older can contribute an additional $1,000. This means the Class A shares and their price of over $325,000 are not an option unless the investor has built up a sizable portfolio. The Class B shares are within the reach of all 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. Therefore, Class B shares make an ideal holding in retirement portfolios.