Investors who don't already own shares in Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) might be wondering if the business is worth owning considering its performance over the past few years.
Warren Buffett (Trades, Portfolio) used to be considered one of the world's greatest value investors. He still is regarded as a great investor, but his performance has deteriorated over the past few years. Rather than outperforming the S&P 500, he has merely matched the market. At the same time, he hasn't made any large transactions, so the value of cash on the conglomerate's balance sheet has swelled to over $140 billion.
This has proved to be a drag on returns. The conglomerate has also missed out on the tech boom of the past decade. This is one of the reasons why Berkshire shares have underperformed the market.
Despite this performance, I remain a shareholder, and I think the business is still attractive from an investment perspective.
Berkshire's operating business
Investors shouldn't concentrate on Buffett when analyzing Berkshire. There is far more to the conglomerate than the Oracle of Omaha's stock portfolio. Even though he is still in control of its extensive equity portfolio and large acquisitions, his primary job today is capital allocation at the holding company level.
To put it another way, Berkshire is now far bigger than Buffett. It is a mistake to concentrate on his successes and failures when analyzing the business.
When analyzing any business, investors should also always try and understand the company's track record of capital allocation. It is just one piece of the puzzle. This is how I think investors should view Berkshire today.
When I look at the business, I see one of the world's largest reinsurance companies, and one of the most successful and efficient auto insurers in the United States.
Management's thoughtful capital allocation decisions have helped these large insurance businesses earn a higher return on their reserves. The portfolio of businesses owned in the conglomerate, including well-known companies such as BNSF and Precision Castparts, the insurance group to earn a substantially higher return on its regulatory capital than it would otherwise be able to do so in the fixed income markets.
Meanwhile, the group's equity portfolio is managed in a way that targets high-quality businesses. Once again, this portfolio aims to earn a higher return on regulatory capital by investing in high-quality companies that are unlikely to cause a permanent capital impairment.
By stripping Buffett out of the analysis, the investment case for Berkshire is more understandable. This is one of the world's largest, best capitalized and most efficient insurance companies.
Many investors might not want to invest in the business for this reason. That's understandable. Insurance can be a complex sector to understand, and if you don't understand something, it's never sensible to invest in it just because you know the manager's name.
So, while Berkshire might have lost some of its appeal as a way to invest alongside one of the best investors of all time, it has investment appeal as an attractive insurance group in its own right. This is why I own the stock. I have worked with people who deal with Berkshire's insurance business or one of its subsidiaries in my professional capacity. As such, I know the company has competitive advantages in this industry. Its capital base and reputation are second to none.
Therefore, I own the stock because I know I'm investing in an insurance giant that is well run and recognized the world over. I did not invest because I wanted Buffett to manage my money through an equity portfolio. The billionaire investor has not managed money for partners since the mid-1960s.
By understanding this distinction, Berkshire remains appealing to me as an individual investment.
Disclosure: The author owns shares in Berkshire Hathaway.
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