What Is Berkshire Hathaway?

What began life as a textile manufacturing company is now a multinational conglomerate holding company and one of the largest companies in the world by market capitalisation. This transformation is thanks to one of the most successful investors of all time, Warren Buffett.

In this article, we will take a look at the history of Berkshire Hathaway, its current investment portfolio and how Buffett managed to create one of the most successful stock market stories of all time.

Berkshire Hathaway History

Berkshire Hathaway’s began life in 1839 as a textile manufacturing company named the Valley Falls Company. Ultimately, following a number of mergers with other textile companies, Berkshire Hathaway came into existence in 1955.

Following its formation, Berkshire Hathaway operated 15 plants, had 12,000 employees and generated annual revenue of more than $120 million. However, by the following decade, eight of these locations had closed, with the company’s workforce and annual revenue cut in half.

It’s around this time that the company began attracting the attention of a young investor named Warren Buffett. He was initially enticed by Berkshire’s cheap share price, which was trading at a significant discount to its book value at the time.

Buffett began buying stock through his investment firm, Buffett Partnership Limited, at $7.60 a share and, by 1965, had accumulated enough shares to take control of the company, paying an average of $14.86 a share. Buffett has subsequently admitted this investment was a mistake and that Berkshire Hathaway was “the dumbest stock I ever bought”.

So the story goes, whilst Buffett was still a minority shareholder, he met with Berkshire management, offering them the opportunity to buy back their shares. He received an oral offer of $11.50 per share, which he accepted; however, when he received the formal offer in writing a few weeks later, it was for $11.375 per share.

Apparently aggravated by this perceived attempt to undercut him, Buffett retained his shares and started increasing his position with a view to taking control and ousting the current leadership, which he eventually did.

Understanding Berkshire Hathaway

Although Buffett originally maintained Berkshire Hathaway’s legacy business of textiles, towards the end of the 1960s he began pivoting the company towards insurance, with the acquisition of the National Indemnity Company.

This pivot towards insurance has proved the engine which has powered Buffett to transform Berkshire Hathaway into the company we know today.

Insurance companies receive upfront premiums from policy holders, which are held by the insurers until such a time as claims come due. This model leaves insurance companies holding large amounts of cash, known as the “float”, which, although eventually will go to others, insurers are free to invest in the interim – subject to some regulatory constraints.

In the hands of a skilled investor, this float – which insurance companies are essentially being paid to hold - has the potential to be incredibly rewarding. This is something Buffett realised early on and which he exploited to create one of the most successful stock market stories of all time.

Between 1965 and 2022, Berkshire Hathaway has produced a compounded annual gain of 19.8%, double that of the S&P 500 over the same time period. Its overall gain in that period has been 3,787,464%, compared with the S&P 500’s more modest 24,708%.

Berkshire Hathaway Portfolio

Due to the investing prowess of Warren Buffett and the high regard in which he is held in the investing world, Berkshire Hathaway’s portfolio is probably the most widely followed in the world.

As well as wholly acquiring dozens of businesses, Berkshire Hathaway has holdings in more than 50 others. The table below shows Berkshire Hathaway’s top ten holdings in terms of current value at the time of writing:

Source: Berkshire Hathaway 13F Filing – 13 August 2023. Current Value and Percentage of Total Portfolio as of 14 September 2023.

Given Buffett’s relatively pragmatic approach to investing, it may come as a surprise to see that almost 50% of Berkshire Hathaway’s $350 billion portfolio is concentrated in one stock, Apple.

Perhaps unsurprisingly, given the size of its holding, Buffett is a big fan of both Apple, which he has said is a better business than any other Berkshire owns, and its “brilliant” CEO Tim Cook.

Berkshire Hathaway started buying shares in Apple in 2016 and, as well as providing a great deal of capital growth over that time frame, it also generates a large amount of cash through its modest dividend payment. In 2022, Apple’s dividend payments netted Berkshire more than $830 million.

Warren Buffett, Value Investing and Dividends

Warren Buffett is a proponent of value investing, a strategy which involves identifying companies whose share prices are undervalued when compared with their intrinsic value.

Having started out with a “cigar-butt” investing mentality - buying cheap, low quality companies for a quick profit – Buffett, under the influence of his partner Charlie Munger, began to seek high quality businesses with a long-term mindset.

This shift in mentality can be seen when you contrast Buffett’s initial acquisition of Berkshire Hathaway itself – a struggling or, to quote the man himself, “doomed” textile operation – with more recent stake holdings in world renowned companies such as American Express or Coca-Cola.

Buffett and Munger’s approach to investing is probably best summed up by Buffett himself in his 2021 annual letter to shareholders:

“Our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.”

In other words, rather than obsessing where prices may end up in a few months or years’ time and picking stocks with a view to selling them in the near future, Buffett and Munger seek to buy pieces of high-quality companies with the intention of holding them for the long-haul.

A characteristic of many high quality businesses is that many tend to pay reliable dividends and dividend paying stocks certainly play an important role in the Berkshire Hathaway portfolio. In 2022, the company generated more than $6 billion cash from dividend payments. However, Buffett’s apparent love of dividends only applies when it comes to receiving payments.

Despite holding a vast amount of cash, Buffett believes that this cash is better utilised and more rewarding for shareholders in the long-term by being invested back into the business for future growth. In the 58 years since Buffett took control of Berkshire Hathaway, the company has only ever paid one dividend, in 1967, with Buffett joking that he must have been in the bathroom when this decision was made.

Nevertheless, that doesn’t mean that Berkshire has not returned capital to shareholders in other ways.

Share Repurchases

Although Apple is by far its largest shareholding, there is one stock which Buffett and Berkshire have spent considerably more money on over the years.

But, despite spending more than $70 billion on this stock since 2018, you won’t find it listed anywhere in the Berkshire portfolio. That stock? None other than Berkshire Hathaway itself.

Share repurchases can be an extremely effective and efficient way for a company to return capital to shareholders. When a company buys back its shares, it reduces the number of shares in circulation, which increases the ownership of continuing shareholders. If earnings continue to increase as shares outstanding decreases, shareholders have the potential to benefit greatly without having to lift a finger.

Buffett has made no secret in the past that he is a big fan of share repurchases, noting in his 2018 letter to shareholders that “If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage.”

How to Buy Berkshire Hathaway Stock

Berkshire Hathaway has two classes of shares available to investors, and has famously never split its Class A shares, which currently trade for more than $560,000.

For investors who don’t have this amount of cash on hand to purchase a single share, Berkshire Hathaway also offer Class B shares, which are somewhat more reasonably priced. Each Class B share offers dividend and distribution rights equal to 1/1,500 of Class A shares, and voting rights equal to 1/10,000 of Class A shares.

Clients of Admirals can invest in both Class A and Class B shares of Berkshire Hathaway with our investing account. In order to invest in Berkshire Hathaway, as well as over 4,500 other listed companies, click the banner below:

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.