Warren Buffett and Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) are two of the most famous names on Wall Street today. They go hand in hand as well, because Buffett is the CEO of Berkshire. If you are looking to invest now, this massive and unique conglomerate could be a very attractive option. Here are three reasons why.
1. Berkshire Hathaway has a very diverse portfolio
While diversification isn't exactly sexy, it is a key aspect of successful long-term investing. You can go about diversification in different ways. For example, you can buy a lot of different stocks from a variety of industries, which is a good idea. Or you can look for investments that have diversification built into their model. Berkshire Hathaway falls into that second category.
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Its largest operations are in the transportation, utility, pipelines, and insurance industries. But the company also owns businesses in the retail, chemical, real estate, and manufacturing sectors, too, among others. In fact, the list of owned businesses is so long that it is hard to keep track of everything going on under the Berkshire umbrella. On top of that, it owns a portfolio of individual stocks, in which it owns just a portion of a given company. That portfolio includes household names like Coca-Cola, Chevron, and American Express.
All told, Buffett has a somewhat eclectic investment style. He tends to buy good companies when they are attractively priced and then he just holds them, letting management do their jobs. If there's a problem, he'll step in to help, but otherwise he is pretty hands-off. Handing off your investments to an expert with a diversified portfolio is the first big reason to consider Berkshire Hathaway.
2. Buffett expects market-like returns for now
Given the diversification of Berkshire Hathaway's portfolio and its huge $940 billion market cap, it takes a lot to move the needle on the top and bottom lines. Buffett actually made sure to point that out in the company's 2023 annual shareholder letter:
There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can't. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.
Given the long-term success Berkshire Hathaway has achieved in beating the market, this may at first seem like a huge letdown. It probably shouldn't be viewed that way, because it means that, given the size of the company, it is a proxy for the broader market in some ways. And with the stock market near all-time highs, that's not a bad thing. But read Buffett's statement more closely, and you'll see he is really only saying that Berkshire Hathaway's disciplined investment style isn't turning up any good buy candidates right now.
If your choice is an index fund or Berkshire Hathaway, the outcome could be a wash in the near term, which is another point in Berkshire Hathaway's favor in a market that's trading near all-time highs. But looking out over the long term, things could be very different.
3. Berkshire Hathaway has a huge cash hoard
Over the long term, one of the biggest strengths Berkshire Hathaway has exhibited is its ability to be opportunistic. Buffett and his team only pounce when they believe they've found a good deal on a well-run company. While Buffett makes mistakes from time to time, he has been right far more often than he has been wrong. Right now, he's not seeing anything worth buying, but bear markets inevitably follow bull markets, so the time will eventually come for buying stocks again.
When that happens, Berkshire Hathaway will have plenty of firepower. At the end of the first quarter, the balance sheet had over $28 billion in cash and $153 billion of short-term marketable securities (government notes). That is all money that could be put toward long-term portfolio investments if -- the key word is if -- an attractive opportunity arose. If history is any guide, this is the catalyst that will unlock long-term outperformance. You just have to be patient and settle for market-like returns over the near term.
What you buy when you buy Berkshire Hathaway
So, in the near term, buying Berkshire Hathaway will get you a large, diversified business that's likely to track the market. But it has a catalyst -- that huge cash hoard -- that could spur long-term outperformance. That's a good reason to buy Berkshire Hathaway today if you are looking to put some cash of your own to work but aren't quite sure what to do with it. In fact, if your choice is between Berkshire Hathaway and a broad-based index fund, it seems like it could be an easy call to go with Berkshire.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
