Berkshire Hathaway (BRK.A -0.09%) (BRK.B -0.24%) has been one of the best investments in history. Since Warren Buffett took over in 1965, shares have increased in value by nearly 20% per year. An investment of just a few hundred dollars would now be worth millions.
Now trading near all-time highs, is Berkshire Hathaway still a buy? The answer might surprise you.
Don't let these numbers fool you
Most investors know what Berkshire Hathaway is all about. The company runs a large portfolio of insurance companies that generate regular investable cash. Buffett and his team then deploy this cash into what they believe to be profitable investments. It is this combination -- reliable access to investable cash and an incredible investing record -- that has turned the company into the $900 billion business it is today.
From several angles, Berkshire Hathaway is no longer the company it once was. The $900 billion market cap is just one indication. In 2000, when the company was valued at roughly $100 billion, the recipe for doubling in size was pretty simple: Add $100 billion in value. But now that Berkshire Hathaway is a $900 billion behemoth, Buffett and his team need to figure out how to add $900 billion in value simply to achieve the same goal of doubling in size.
In sum, Buffett's job has gotten significantly harder as Berkshire Hathaway has grown larger. And he's not oblivious to this reality. "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," Buffett recently told shareholders. "All in all, we have no possibility of eye-popping performance."
There is no doubt that Berkshire Hathaway will eventually experience slower growth due to the law of large numbers. Critics have been arguing that for decades. Yet so far, the company has incredibly exceeded expectations. Since 2000, the company's market cap has grown by nearly 1,000%. But annual book-value growth has remained within a similar historical range. That's even more impressive considering the company has repurchased tens of billions of dollars in shares, which, while accretive to shareholders overall, tend to suppress accounting-book value.
Historically speaking, the data is clear: Berkshire's gargantuan size alone shouldn't deter you from investing.
BRK.B Market Cap data by YCharts.
Should you buy Berkshire Hathaway stock?
At age 93, Buffett won't be managing Berkshire Hathaway forever. But for more than a decade, he's been preparing a succession plan that includes a handful of handpicked successors who not only have years of experience at the company but have incredible resumes from before their time at Berkshire Hathaway. These trusted lieutenants are already deeply woven into the company's operations. Todd Combs and Ted Weschler, for example, are reportedly behind Berkshire Hathaway's $200 billion bet on Apple -- one of the company's most successful investments in recent history.
Having unwavering faith in Buffett's investing acumen has proven a wise decision for decades, even when the odds appear to turn against him. Trusting his succession plan may prove yet another wise bet for patient shareholders.
But if size and succession aren't concerns, what about the valuation? Right now, Berkshire Hathaway stock trades at 1.7 times book value. In 2020, it traded as low as 0.9 times book value. And over the last five years, shares have traded at an average of 1.4 times book value.
Might Berkshire Hathaway stock be overpriced? Perhaps. But paying a small premium for a high-quality, long-term holding is rarely an issue. For instance, shares traded above 1.5 times book value in 2005, 2009, 2015, and 2017. In all of these cases, shares turned out to be a wise investment. And right now, the company's share buybacks are masking its true book value more than ever.
Now certainly isn't the best time in history to buy Berkshire Hathaway. But as its own history has proven, long-term investors shouldn't be scared to take a position, even at these prices.
