commentary
authored by
Is Berkshire Hathaway a Buy?
Yes. Berkshire has a great track record with Buffett at the helm and will more than likely have a great future track record after Buffett is gone. However, there are two specific risks that you should be aware of.
Risk 1 – Market Crash Risk.
When the market crashes, Berkshire crashes. This is not the case with some other money managers. In the chart below, I plot a $1,000 investment in Berkshire Hathaway (red line) and Transtrend BV. Transtrend is a large systematic trend following money manager based in Rotterdam. They have a 28 year track record, (starting in 1995). Transtrend uses nothing more than public market data to buy and sell. They do not use personal relations, sweetheart deals, or bailouts to assist their performance.
At a first glance, you will notice that Berkshire under-performed Transtrend for the first 22 years (1995 – 2017). Berkshire dipped below Transtrend again in2022.
At a second glance (below), you can see that Berkshire provides a far more bumpier ride than Transtrend. But more importantly, Berkshire always loses ground when the general stock market declines or crashes. In other words, Berkshire is losing when everybody else is losing. This should be a cause for concern for a serious investor.
Risk 2 – Political Risk
When you buy a share in Berkshire Hathaway, you are investing a collection of carefully selected and well-guarded ‘near’ monopolies and ‘near’ cartels. I have already written about Warren Buffett’s talent for selecting companies with dominant market positions and pricing power. In his own words - “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”
Berkshire has proven very successful at identifying pricing cartels that hide in plain sight. Warren has often joked about how poor airline investments are. Yet in 2018 he owed just under 10% in each of the four major US Airline companies that in turn controlled 80% of US domestic-seat capacity. The US banking cartel has been another favourite of Berkshires. Whether the general public considers these industries to be cartels or not is irrelevant. Buffett only invests in them because, in his view, they have monopoly or ‘near’ monopoly pricing power. Furthermore, these industries always have government support. (2020 Airline Bailouts)
A risk for Berkshire Hathaway is if somehow the US government does not want to or is not able to bailout Berkshire investments in a massive system wide market and economic crash. In this case we would have to imagine a 1930s style crash and depression, perhaps followed by a new regime that would target, break up, and penalise monopolies or cartels in banking or insurance etc. But even all of this only adds up to a lower share price for Berkshire Hathaway. Bankruptcy is hard to envisage.
Money managers like Berkshire Hathaway do have some political risk. This is not the case for other money managers.
Conclusion
The final answer is yes. Berkshire is a solid investment. But maybe wait for another market crash. Remember Berkshires share price fell over 45% during the great financial crisis in 2008/09 and 23% at the outset of the Covid 19 hysteria.
Finally, it would be remiss of me not to include a chart of our own performance. The chart below shows that the Great O’Neill has had a solid first five years compared to Transtrend. But we have some catching up to do.
