Berkshire Hathaway
Berkshire Hathaway is ultimately a conglomerate, a public holding company that has large stakes in other companies. In November, we explored changes in Berkshire Hathaway's portfolio, which is largely composed of five different companies.
Buffett takes care to differentiate his company from the conglomerates of the 1960's. Those early conglomerates were criticized for rarely making any institutional changes to their acquisitions. Because they made investments during a period of heavy inflation and because of some dubious accounting practices like share splitting, their reported earnings were successful for quite some time. Nevertheless, they reaped benefits only in the short-term.
Buffet believes that "if the conglomerate form is used judiciously, it is an ideal structure for maximizing long-term capital growth." He argues that conglomerates allow capital to be allocated rationally and efficiently. Individual shareholders do not have the same liquidity that conglomerates have. Companies that are specialized in one industry do not have the means or desire to quickly enter a different industry as a conglomerate could.
Buffett says, "At Berkshire, we can - without incurring taxes or much in the way of other costs - move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise."
Berkshire Hathaway issues two different types of shares that each target completely different audiences. Berkshire Hathaway's class A shares
In the past, the B shares were worth 1/50th of the cost of the A shares. In 2010, Buffett had split the class B shares. This split matches his intent for the class B shares to be available to the everyday investor.
Many are questioning why Buffett doesn't split the class A shares of Berkshire Hathaway. At first glance, Berkshire Hathaway's class A shares seem overpriced and inflated. But, Buffett's investment philosophy proves otherwise.
Buffett is seeking long-term investors with his Class A shares. Due to the high price of the stock, owners are unlikely to sell or buy the stock over minor price shocks. Buffett said, "I don't want anybody buying Berkshire thinking that they can make a lot of money fast."
He points the 1960's conglomerate model, stating that "Marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise"
At the end of the day, Buffett prides himself on the group of long-term investors that Berkshire Hathaway has attracted: "I would be remiss if I didn't salute [the] key constituency that makes Berkshire special: our shareholders. Berkshire truly has an owner base unlike that of any other giant corporation. "
In particular, Buffett cites the decision he left to his shareholders last year. He allowed them to vote on whether excess funds should be returned to them or reinvested in new holdings. The overwhelming majority of both class A and class B shareholders agreed that reinvestment would offer better long-term growth.
Warren Buffett has constructed this group of investors by leading Berkshire Hathaway for fifty years. Even as Buffett grows older, it is uncertain who will succeed him Buffett has remained steadfast in his views of long term investing and shareholders are worried that the identity of the company could change with a different CEO.
Today, Buffett is the primary shareholder of Berkshire Hathaway by far. Other major shareholders include Fidelity Management and Research Co, Gottesman David Sanford, and First Manhattan Co. The actual number of shares held by each major entity are hidden and but are likely to remain relatively steady.
Buffet's imprint on Berkshire Hathaway is enormous, both with his financial holdings and his business acumen. His decisions are closely watched and analyzed by investors everywhere. His philosophy on long-term investing has proved invaluable to Berkshire Hathaway. He has jokingly said, "Our favorite holding period is forever."
Sources:
- Buffet, Warren. Berkshire Hathaway Special Letter. Berkshire-Past, Present, and Future.
- Investopedia, What is the difference between Berkshire Hathaway's Class A and Class B shares?
- Edwards, John. The Biggest Risks of Investing in Berkshire Hathaway Stock (BRK.B)
