1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Rupert Hargreaves
Rupert Hargreaves
Articles (1261)  | Author's Website |

The Difference Between Warren Buffett and Berkshire Hathaway

They are no longer one and the same

May 27, 2020 | About:

Since the annaul Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) meeting earlier this month, I've noticed a significant increase in editorials criticizing Warren Buffett (Trades, Portfolio).

These articles have attacked the Oracle of Omaha for everything from underperforming the market in recent years to not making the most of the market decline in March and selling his airline stocks.

He has also been attacked for not spending more of his large cash balance and not repurchasing enough shares.

I usually ignore these discussions when they come up because they have historically been a great contrarian indicator. However, something I've been thinking about a lot over the past year or so is what happens to Berkshire after Buffett. The Oracle of Omaha isn't going to live forever, and he's been positioning the conglomerate for his demise for the past decade or so.

The culture he has created at Berkshire is second to none and for that reason, I'm not worried about what happens to the business after its legendary CEO departs.

Nevertheless, Buffett's recent actions have got me thinking: What's the main reason for investing in Berkshire? Is it to invest alongside possibly the greatest investors of the 20th century, or is it to own one of the largest insurance conglomerates on the planet?

Buffett vs. Berkshire

Distinguishing between the two is essential.

If you buy Berkshire to have Buffett effectively manage your money, it becomes important that he's underperforming the market and making mistakes.

On the other hand, if you're buying an insurance business with a great portfolio manager, Buffett's performance becomes less relevant to the overall investment case.

There's no fixed answer to this problem, and this discussion is only designed to express my thoughts on the matter.

Berkshire's standalone strengths

As Berkshire has grown over the years, it has become increasingly difficult for the Oracle of Omaha to beat the market. He has said as much himself on many occasions. The conglomerate has become so big that it struggles to find any investment large enough to move the needle.

Therefore, it has been steadily losing its appeal as an investment fund. There are other funds out there that have been able to chalk up much better returns.

But when viewed as an insurance giant, there's no other company in the world that has the advantages Berkshire possesses.

Its combination of insurance groups, such as National Indemnity, Geico and General RE, can write large policies that no other company has the financial firepower to stomach.

Simultaneously, while most insurance groups invest their capital in large portfolios of bonds, Berkshire has BNSF and Berkshire Hathaway Energy (and the equity portfolio). These compounding machines produce much higher returns than bonds and throw off capital to be used elsewhere.

Put all of the above together, and it seems sensible to suggest that we shouldn't be judging Berkshire based on Buffett's investment decisions today. Instead, we should view the enterprise as a global insurance giant, with a legendary capital allocator at its head.

Buffett won't be around forever, and Berkshire's size means it's unlikely to be able to yield the sort of consecutive 20%-plus per annum returns as in the past. But that does not mean that its competitive advantages in other areas have been eroded. If anything, the company is stronger in insurance today than it has ever been before. If you want to judge Berkshire on anything, that's where we should be looking -- not Buffett's stock-picking performance.

The bottom line

These are just my thoughts on what seems to be a very decisive matter. As an owner of Berkshire, I'm increasingly looking at the business as an insurance giant rather than Buffett's investing performance because it is now far bigger than its CEO.

Disclosure: The author owns shares of Berkshire Hathaway.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


Rating: 4.8/5 (5 votes)

Voters:

Comments

Praveen Chawla
Praveen Chawla premium member - 2 months ago

Excellent article. I think Buffett / Munger may be deemphasizing portfolio management and moving to a full conglomerate structure. Buffett/Munger may yet make a huge purchase in the coming months. It is possible that a company like GE might become part of Berkshire or even a bank like BAC.

Endeavour
Endeavour premium member - 2 months ago

Going forward, once the legendary capital allocator is gone, will his replacements prove to be legendary capital allocators? Why didn’t they buy during the March 2020 lows?

Rupert Hargreaves
Rupert Hargreaves - 2 months ago    Report SPAM

Thanks for your comment Praveen. I agree a large acquisition may be on the cards in the next few months, a bank might fit the bill perfectly.

dunyuliu
Dunyuliu - 2 months ago    Report SPAM

Hi Rupert, Thanks for another great article. As said in his annual letters in recent years, Buffett and Munger are more focusing on operating businesses, though the investment portfolio is still and would be always an improtant asset of Berkshire. If we treat those equity interest in the investment portfolio as portions of operating businesses, which I think Buffett and Munger may sort of agree, we may not need to differentiate investment portfolio and operating businesses, as long as those businesses yield above average earnings and are aquired at reasoanble prices. Their future performance cannot be their past splendid 20% per annum in the future, but at its current valuation, there are still much upside. Given the operating businesses yield an average $21bn (after tax) in the past 5 years and a PE of 14 and after I give a PE of 14 for the AAPL and KO in his investment portfolio, the operating businesses and the investment portfolio will add up more than its current market cap. The cash positions may add more earning power in the future and I think we don't need to worry too much about Berkshire's management to diworsify their business portfolio.

By the way, the most important message I take from this year annual meeting is when Buffett said that 'we don't see anything that is attractive to do.' I sort of agree. One thing I am confused with Buffett is that he didn't buy back stocks much. I think either that he expects more market decline in the future, given the deteroriating economy, or that he has some targets that he think would be more attractive than BRK and would be worth the waiting. Anyway, these are just my speculations. I own BRK B shares. -Dunyu.

raj123456789
Raj123456789 - 2 months ago    Report SPAM

Another big advantage to BRK insurance business - they dont have to buy reinsurance from anyone.

Rupert Hargreaves
Rupert Hargreaves - 2 months ago    Report SPAM

Hi Dunyu, Thanks for your comment, I agree with you on all of those points. As we've also speculated in the comments above, a big deal could be on the cards, possibly a bank? I've tried to add some color on why Buffett might not have bought back much stock in Q1. I think there are two main reasons, firstly, he wants to keep his powder dry for possible insurance losses and second, Berkshire was buying back shares before it entered the pre-earnings blackout period, then Buffett stopped in the two weeks before the earnings release. It will be interesting to see how much he's been buying back in the last few weeks.

asawhneyy
Asawhneyy - 2 months ago    Report SPAM

The problem is we put too much trust on Buffet judgement- last 10 years proved market is bigger than Buffet.

Buffet will buy if any thing that he already owns-examples were Geico, BNI,--most probably he will buy American express he already owns a lot-my guess.

$137 billion?

Please leave your comment:



Performances of the stocks mentioned by Rupert Hargreaves


User Generated Screeners


pjmason14Momentum
pascal.van.garsseHigh FCF-M2
kosalmmuse6
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
kosalmmuseNice
kosalmmusehan
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)