Warren Buffett may be the greatest investor the world has ever seen. Rather, he probably has the most public resume to make his case. Mr. Buffett’s holding company, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), provides decades of evidence of Mr. Buffett’s Wall Street wizardry.
If you invested just $1,000 when Berkshire Hathaway went public in 1980, you would now have more than $2.3 million in assets. This provides truly life-changing returns for a modest investment.
But Berkshire Hathaway is now worth nearly $1 trillion, and Buffett recently turned 94. Can this stock still turn long-term investors into millionaires?
Berkshire consistently creates value
Buffett’s job is not easy. Berkshire Hathaway is a holding company and an entity that owns various other businesses and assets. Berkshire Hathaway owns dozens of private companies, including GEICO insurance, railroads, energy pipelines, manufacturers and consumer brands such as Dairy Queen and Fruit of the Loom. The firm also operates a vast stock portfolio with nearly 40 positions worth approximately $316 billion. Buffett and his management team must act as the conductors, pulling and pushing the appropriate buttons and levers for all of these moving parts to create value for Berkshire and its shareholders.
Berkshire has been consistently successful in this regard, increasing its book value over decades through the ups and downs of the economy.
BRK.A tangible book value (per share per year) chart
This steady value creation is driving the company’s impressive stock price performance. Sure, Berkshire is a behemoth today, but its stock can generate wealth for you if management wisely allocates Berkshire’s vast financial resources to increase book value.
Berkshire is ready for the next big opportunity
Buffett appears to have lost none of his sensibilities or instincts even as he ages.
The meteoric rise in Berkshire’s book value over the past decade can be attributed to Buffett’s investment in Apple, perhaps the most extraordinary feat of all time. Berkshire acquired Apple in early 2016 at a price-to-earnings ratio of about 12 times. Since then, Apple has become a multi-bagger, gaining more than 860%. That investment has grown to be worth hundreds of billions of dollars, and Buffett began selling earlier this year as Apple stock’s price-to-earnings ratio approached 35 times. This is the definition of “buy low, sell high.”
Not only did Berkshire capture much of Apple’s profits by selling a portion of its stake, it also put itself in a financial position to be opportunistic again. The company currently has an estimated $277 billion in cash, which is approximately 28% of its current market capitalization.
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Knowing Berkshire’s track record, there’s a good chance that Buffett and Berkshire’s management will ultimately put that money to good use, and shareholders will benefit.
Should investors be concerned about Buffett’s age?
Approaching Buffett’s age as respectfully as possible, it’s natural to wonder about Berkshire’s long-term leadership. After all, Mr. Buffett is 94 years old and looks as healthy and sharp as ever, but time eventually gets the better of us all. But just because Buffett won’t be steering the ship forever doesn’t mean investors should avoid Berkshire.
It would be insulting for Berkshire to pretend it doesn’t know this — it has a succession plan. Buffett has already named Greg Abel to lead Berkshire after his death. Mr. Abel has been with Berkshire for over 25 years and has definitely served as a student under Mr. Buffett’s guidance.
Will Mr. Abel allocate Berkshire’s capital like Mr. Buffett? There’s only one Mr. Buffett, so that’s a legitimate concern. However, Berkshire is one of the most financially and fundamentally strong companies in the world. It has the potential to create value for shareholders for decades to come. Consider having faith until there is no reason not to have faith.
Is Berkshire a billionaire maker?
Berkshire can continue to grow. There are always additional investments or companies to acquire that increase book value. Remember that companies within Berkshire also grow over time.
It’s also fair to acknowledge that Berkshire is worth nearly $1 trillion and may be too big to generate the same profits it once did. The days of Berkshire turning $1,000 into $1 million are probably over. But Berkshire can still build wealth over time as part of a diversified portfolio.
Anyone with a long-term view should consider buying and holding this unique company.
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Justin Pope has no position in any stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Is Berkshire Hathaway a billionaire maker? Originally published by The Motley Fool
