Helmed by arguably the most famous investor of all time, Warren Buffett, Berkshire Hathaway (BRK.A -2.20%) (BRK.B -2.03%) has had a long and storied history of delivering incredible returns to its shareholders. Under the disciplined and patient care of Buffett and, until recently, his late partner Charlie Munger, Berkshire has grown into one of the largest and most valuable companies on the planet.
The journey has been immensely rewarding to shareholders. Those lucky enough to invest years ago were taken on an incredibly lucrative ride. The stock has definitely made more than a few millionaires over the years. Take a look at the growth of a $10,000 investment made in 1980.
Berkshire is much more than its investments
While much of the attention focuses on the firm's outside investments in companies like Apple and American Express, Berkshire is a large conglomerate running a diverse set of lucrative businesses from railroad operations to manufacturing. Chief among these is its insurance businesses, whose premiums accounted for $83.4 billion of the total $364.5 billion of top-line revenue the company earned in 2023.
This cash-rich business provides a steady flow of capital that can then be used to make the investments Buffett is famous for. The great thing about this capital is that it is essentially a form of leverage; insurers collect premiums for damages that will happen in the future. This is known as insurance float and it is critical to the outsized returns Buffett has made over the years. Think of it like a very cheap loan; the average rate Berkshire pays on its float is just 1.7%. That is a powerful tool to magnify returns.
According to Buffett, given the nature of Berkshire's insurance contracts, the company is never under threat of having to suddenly pay out a significant portion of this float all at once. The maximum is just 3%. Most of the risks associated with traditional means of leverage are almost entirely absent in Berkshire's model, giving it a significant edge in the market.
One threat to Berkshire's insurance business, however, is the growing threat of climate change. While this year has been very positive for the company with significantly improved operations at Geico that helped boost underwriting earnings for much of the year, the third quarter saw the company's underwriting take a $1.7 billion year-over-year hit. This was in largely due to Hurricane Helene. As major weather events increase in frequency, Berkshire's insurance segment could be strained, although it's unclear to what degree.
A major transition is coming
The elephant in the room at Berkshire is the fact that its inimitable leader will not be here much longer. In a recent letter to shareholders, Buffett wrote that "Father time always wins" adding that he "can be fickle – indeed unfair and even cruel – sometimes ending life at birth or soon thereafter while, at other times, waiting a century or so before paying a visit. To date, I've been very lucky, but, before long, he will get around to me."
When this does come to pass, it will be a difficult time for the company. Few firms are as intimately tied to their leaders as Berkshire Hathaway. It's hard to separate the two. Still, Buffett is making plans and laying the groundwork for a smooth transition. In fact, he's been doing so for some time.
Many of the investment decisions at Berkshire have been made by other managers at the firm for years, and Berkshire has always taken a relatively hands-off approach to managing its directly held companies. Buffett has left an indelible mark on the culture of Berkshire and the philosophy governing its leadership; it will survive long after he's gone.
The question at hand
So, is Berkshire stock a millionaire maker? It's hard to classify it as such any longer. The company is just too big, and the sort of extreme growth required to be considered a millionaire maker is unlikely at this point. That being said, Berkshire is still an excellent investment. I believe its stock will continue to outperform the market, even after Warren Buffett is no longer at the helm.
