Would I buy shares in Warren Buffet’s company – Berkshire Hathaway?

While this might be controversial, there are several issues I see with investing in Berkshire Hathaway (BRK-A, BRK-B), that would stop me from buying shares. While I’m a great admirer of Warren Buffett and Charlie Munger, as an investor, I want to know when and how I will receive a return on my investment. There’s not much point in investing in something, if you can’t envision the end game. At some point as an investor, you either want to be able to sell the investment and make a profit, or you want to receive a return along the way (usually in the form of dividends).

Since Berkshire Hathaway doesn’t pay dividends, all investors in the company must therefore have a strategy of selling their shares at some point in the future. Now that’s all well and good while Warren’s running the show and growing book value by more than the market is growing. In other words, the share price and value of the company should be growing faster than any investment that you or I could make.

The issues as I see it are as follows:-

  • What happens when Warren Buffett and Charlie Munger are no longer running the company? While I don’t intend any disrespect, they are both fairly old men and at some stage they will die, or may become incapable of running the company any longer. How do we know if their successors are as able as they are? Will they be able to achieve the same returns as Warren and Charlie? Personally, I wouldn’t trust that they are that capable.
  • Do you think the prices of Berkshire shares will fall when the company announces that Warren or Charlie have retired? How soon and when will that happen?
  • The larger the company grows, the harder it is for Berkshire to achieve the same returns as it has in the past. The company either has to take more or higher risks, or accept lower returns. Buffett himself has discussed this issue and has said that it would be easier for him to invest $1 million dollars that it is to invest billions.
  • The success of Berkshire has a lot to do with the success of the US companies that he has bought or invested in. Think how Coca-Cola and American Express have grown over the last 30, 40 or 50 years. I realise that many US companies are global companies – with operations all over the world, but I suspect that the majority of their income comes from the US. Can US companies continue to be successful? Although Berkshire has invested in non-US companies, they are a minority compared to Berkshire’s US investments. How will the US government debt (in the trillions) affect these US companies in the future? I have no idea, but personally I think it’s a risk.
  • Many truly successful investors have followed the mantra of “invest in what you know”. Personally I find Berkshire just too complex. While many of the companies it owns aren’t complex, Berkshire’s Insurance business owns multiple insurance companies (with multiple subsidiaries) both in the US and globally. The large the company grows, the more complex it becomes.
  • What effect does the personality of Buffett have on Berkshire’s subsidiaries and their respective management teams? Do you think they aspire to be brilliant while working for Buffett? Do you think he engenders a sense of pride and loyalty in them? How will they feel and act when he’s no longer around? If I was an investor, that would worry me greatly.

Summary

Without paying dividends, the only return from buying Berkshire shares would be to sell them in future for a capital gain. The chances of seeing that capital gain diminish, the longer your holding period (and all to do with when Warren Buffett and Charlie Munger play no further part in the company’s future).

So there you have it, several reasons why I wouldn’t buy shares in Berkshire Hathaway today, even if the shares were trading at a discount to book value.

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2 Responses to Would I buy shares in Warren Buffet’s company – Berkshire Hathaway?

  1. Kristian says:

    Nice blog. But you guys haven’t posted in a while. What’s going on?

    • surfingmike says:

      Hi Kristian,

      Apologies, but I’m now working full time for The Motley Fool (www.fool.com.au), and don’t have the time to post other articles here. I’d love to be able to keep it more up to date.
      Cheers
      mike

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