Berkshire Hathaway (BRK.A) (BRK.B) has generated extraordinary long-term investment returns since 1965, when Warren Buffett took over and transformed it into a diversified investment conglomerate, achieving a compound annual growth rate of nearly 20%. Its performance far surpasses market benchmarks. For instance, a $1,000 investment in 1965 would now be worth approximately $55 million, whereas the same amount invested in the S&P 500 index would have grown to only about $390,000 over the same period. Recently, the company reported strong third-quarter results, with operating profit increasing 33% year-over-year to $13.5 billion, while its massive cash pile grew to a record high of $381 billion. This lays a solid foundation for Greg Abel, who is set to succeed Buffett as CEO at the end of this year, to take the helm of this trillion-dollar market cap giant.
The core of Berkshire’s business model lies in its diversified business portfolio and substantial investment assets. It operates numerous subsidiaries spanning various sectors such as insurance, railroads, energy, manufacturing, and retail, including GEICO, BNSF Railway, and Dairy Queen. Most of these businesses generate stable and substantial cash flows and exhibit strong resilience to economic cycles. Simultaneously, the company holds an equity investment portfolio valued at approximately $313 billion, with major holdings including prominent blue-chip companies like Apple and American Express, making it a benchmark for value investing in the eyes of many investors. Two key metrics of its health—insurance float and operating profit—have continued to grow over the past three years, even amid macroeconomic challenges. This resilience stems from several factors: the essential nature of the insurance business, the strong pricing power of its core operating businesses, and the positive impact of the rising interest rate environment on the returns from its massive cash reserves.
As Buffett approaches retirement, the company faces new challenges and market scrutiny. Its continuously accumulating cash reserves (now reaching $382 billion), coupled with recent moves to suspend share buybacks and reduce some core holdings, are interpreted by some market observers as signals that management views current market valuations as too high and lacks attractive investment opportunities. This could lead to slower future growth for the company, potentially causing it to underperform the market at times. Furthermore, whether successor Greg Abel can continue Buffett’s successful investment strategy and management philosophy is the primary focus for long-term investors. The market is watching closely to see how Abel will steer this business behemoth in the “post-Buffett era.”
In the context of the current generally high overall market valuations, Berkshire’s stock, with a price-to-earnings ratio of around 22, appears relatively reasonably priced. Although short-term stock price volatility is possible during the leadership transition period, the company’s fundamental strengths remain solid. Analysts point out that as the “Buffett premium” gradually fades and concerns over short-term factors like insurance earnings weigh on the market, the stock price has recently experienced some adjustment. This might present an opportunity for long-term investors. The key lies in whether Abel can demonstrate exceptional operational capabilities and adhere to the company’s time-tested value investing principles. If he succeeds in doing so, Berkshire Hathaway, with its robust business foundation and defensive characteristics, remains a long-term, stable investment worthy of consideration.
