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Berkshire Hathaway: A Great Company, but Consider These Factors Before Buying

CEO Khai Intela
Introduction In the world of Wall Street, few names command as much respect as Berkshire Hathaway. Led by legendary CEO Warren Buffett, this conglomerate has an incredible track record and offers compelling reasons to invest....


In the world of Wall Street, few names command as much respect as Berkshire Hathaway. Led by legendary CEO Warren Buffett, this conglomerate has an incredible track record and offers compelling reasons to invest. However, it is essential to consider all angles before diving in. In this article, we will explore a few reasons why Berkshire Hathaway might not be the right choice for every investor.

1. Long-term Performance Requires Commitment

Over the past decade, Berkshire Hathaway's stock has risen by approximately 215%, outperforming the S&P 500 Index's 155% gain. However, when considering dividends, the numbers become less compelling. Since Berkshire Hathaway does not pay dividends, its total return remains at 215%. In contrast, reinvesting dividends in the S&P 500 would result in a total return of about 205%. This diminishes Berkshire Hathaway's lead.

BRK.B Chart Fig. 1: BRK.B Chart

Looking at the past year, Berkshire Hathaway has lagged behind the S&P 500. While Berkshire Hathaway gained just under 15%, the S&P 500 experienced a price advance of around 20% and a total return of about 22%. It's clear that an investment in Berkshire Hathaway might not be a guaranteed success.

However, when examining the company's long-term performance, the picture changes significantly. Since the turn of the century, Berkshire Hathaway has soared by nearly 900%, compared to the S&P 500's stock-only gain of almost 220% and total return gain of nearly 400%. To truly benefit from investing in Berkshire Hathaway, one must be prepared for a substantial long-term commitment and believe in its future prospects.

2. Complexity Unveiled

Most companies excel in one or two specific areas. Berkshire Hathaway, however, operates as a holding company that invests in various industries, either through acquisitions or investments. From insurance to utilities, train companies, furniture stores, and even a paint maker, Berkshire Hathaway has a diverse portfolio. Additionally, the company invests in publicly traded stocks using premiums paid to its insurance subsidiaries.

CEO Warren Buffett treats the businesses, including those owned outright by Berkshire Hathaway, as any investor would. He identifies promising companies with competent managers and allows them to do their jobs. Buffett only intervenes when necessary. Tracking the vast array of businesses and industries within Berkshire Hathaway's portfolio is challenging for most investors. Hence, investing in this conglomerate requires trust in Buffett and his team to make the right decisions on your behalf.

It is crucial to understand that Berkshire Hathaway is anything but a simple business, despite its folksy and easy-to-read annual reports. If you prefer simplicity in your investments, Berkshire Hathaway might not be the best fit for your portfolio.

3. The Absence of Dividends

One notable characteristic of Berkshire Hathaway is its lack of dividend payments. Although the company possesses substantial cash reserves to distribute dividends, Warren Buffett prefers to retain the earnings within the company. Consequently, shareholders cannot expect dividends any time soon, considering Buffett's control and ownership.

If you rely on the income generated from your investment portfolio, Berkshire Hathaway may not be the ideal option. While selling some Berkshire Hathaway shares to generate cash is a viable strategy, it becomes challenging during years when the company underperforms. Selling shares in a downturn could leave you short on cash. Therefore, Berkshire Hathaway isn't the sure-fire choice for income-focused investors.

A Great Company, but Not for Everyone

There is no denying that Berkshire Hathaway, along with CEO Warren Buffett, deserves the accolades it receives for its long-term performance. However, it's important to remember that not every year will yield exceptional results. Moreover, the complexity of the conglomerate demands substantial trust in its management. Lastly, if dividends play a crucial role in your investment strategy, Berkshire Hathaway might not meet your expectations. All in all, while it's an outstanding company, Berkshire Hathaway may not be the perfect fit for every investor.