Given the recent focus on Berkshire Hathaway, Warren Buffett’s holding company and investment vehicle, Editor Kent Lucas takes a closer look at what makes it so special.

Let me start off by saying this upfront: When it comes to Warren Buffett, I’m biased. As a student and professional investor, I’ve been schooled in his investment and principles and analytical approach. Following Buffett, I consider myself a value investor who does fundamental analysis to find outstanding companies that are also outstanding (long-term) investments.

In times of crisis and opportunity (e.g. the current environment), Warren Buffett gets a lot of attention as his investment activity and his spoken word are closely followed. The performance of Berkshire Hathaway is closely monitored too. You can even bid to have lunch with him (for a measly million dollars). His annual letter to shareholders, just out, is essential reading for both recreational and serious investors alike. Why?

The Oracle of Omaha (which is where he lives and where Berkshire is located) provides wise words for at least two key reasons:

1. Buffett simply is one of the greatest investors of all time, and has influenced thousands of successful money managers for this reason. His investment approach and philosophy is rigorously followed by value investors.
   
   His long-term approach and results speak volumes. The results of Buffett’s Berkshire Hathaway are incredible, having a compounded annual return of 20.3% (compared to 9.3% for the S&P500, for the period 1965 to 2009)
   
   
2. Secondly, Berkshire has a hand in over 70 different businesses and all different types of industries, giving Buffett firsthand access to data and insight into what’s really going on with the economy and individual sectors.
   
   The information flow Buffett receives from all his companies is as insightful as the information our government and the Federal Reserve collects for its policy decision-making. And we can add in the detailed economic information he now gets from the railcar/shipping industry with the Burlington Northern Santa Fe (BNSF) acquisition.
   
   So, when Buffett makes an investment or macro-economic-based decision, it gets extra appreciation by the investment community.

In sum, when Warren Buffett speaks, everyone listens.

Berkshire Hathaway as we know it started 45 years ago as a single company, a textile manufacturer. Mr. Buffett has grown it into a $200 billion conglomerate that operates in a variety of businesses such as insurance (Geico & General Re), utilities (MidAmerican Energy), railroads (BNSF), sweets (Dairy Queen and See’s Candies), jewelers (Borsheim’s), and paintmakers (Benjamin Moore), to name a few.

Insurance (including property/casualty and reinsurance) is the largest component of Berkshire Hathaway, but Buffett’s investment portfolio also has performed well. Stakes in companies like Coca-Cola, General Electric, Proctor & Gamble, Goldman Sachs and American Express have been both recent and long-term winners for Berkshire Hathaway’s performance.

Actually, many of the core operating businesses (e.g. utilities, manufacturing and retailing) had a soft year, since generally they are closely tied to overall economic activity. And in his report, Buffett overall was moderately positive on the stock market outlook for the year (and similarly unenthusiastic about the bond market).

For quite a long time, the shares of Berkshire had an elite association. Shares were at nose-bleed prices, exceeding tens of thousands of dollars, so many of us couldn’t afford to own a piece of Mr. Buffett’s empire.

But with the recent $26 billion acquisition of Burlington Northern, new shares were split and issued, with Berkshire Hathaway B shares (BRK.B:NYSE) currently priced at $80/share. Also, Berkshire Hathaway replaced BNFS in the S&P 500 Index, which increased buying by many index-based funds. This increased level of exposure and liquidity is a positive for the stock.

Unmatched Success: Offense Strong and Defense Stronger

The following quote from Buffett’s 2009 letter to shareholders seems worth noting:

“First, we have never had any five-year period beginning with 1965-69 and ending with 2005-09 – and there have been 41 of these – during which our gain in book value did not exceed the S&P’s gain.

Second, though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that’s likely to continue.”

These words are an important acknowledgement and investment consideration. For 2009 the (book) value of Berkshire Hathaway was up 20% (compared with 27% for the S&P 500). In the horrific year 2008, BRK.A outperformed the market by being down “only” 10% (in book value terms) compared to the market down 38%. Of course, Berkshire’s long-term track record is outstanding. But 2008 highlights a very important concept for long-term investors that I try to focus on – capital preservation. The chart below illustrates what a great investment Berkshire Hathaway has been.

View Larger Chart

Given my similar investment style and goals for Safe Haven Investor readers, I am trying to position the Safe Haven portfolio to have similar performance characteristics as Berkshire Hathaway. (I mean, who wouldn’t?)

But specifically, beyond aiming for the incredible long-term performance, I’m very keen on the defensive aspects of the Buffett style, which means outperforming (or doing less badly) in negative return periods compared to the broader market. And as a reminder, I might sound like a broken record with this, but looking for the higher quality companies – with good dividend yields and attractive valuations – further helps provide downside protection.

That is the essence of capital preservation – protecting one’s nest egg in tough times. It’s something that Warren Buffet doesn’t get as much recognition for. (Which is partly understandable, because his long-term outperformance of the market overall is so impressive, people tend to just focus on that.)

Taking a glance at the Safe Haven portfolio, there are a few names that Mr. Buffett owns too, or that otherwise fit nicely into his investment philosophy. A few of those include Clorox (CLX:NYSE), General Electric (GE:NYSE) and Otter Tail Corp (OTTR:NASDAQ).

Yes, I’m all about wealth creation – beating Mr. Market – and you should be as well. And 2009 was a good year for Safe Haven Investor readersin that regard. But in general, and specifically after 2008’s performance, you should pay keen attention to your overall portfolio’s ability to withstand downturns – as a strong defense is just as valuable as a strong offense. When trying to invest for the long term, losing less is as critical an objective as winning more (i.e. beating the market).

Owning Berkshire Hathaway?

So, should you now buy shares in Berkshire? It’s hard to say no, given the track record, the upside for both the conglomerate of businesses exposed to improving economic conditions, and longer-term global trends. Then combine all that with the potential returns and opportunities that come from Mr. Buffett’s well-positioned investment portfolio.

I also wouldn’t worry about Buffett’s age and what happens when he steps down. The management team there is excellent, and nothing much should change about the company or its results. So, while the succession issue is getting a lot of media attention, it doesn’t concern me.

I imagine that when Buffett steps down (many years from now, I hope), the stock might suffer temporarily, but I would view it as a buying opportunity, as many investors will falsely lose faith in the organization.

Lastly, Mr. Buffett is first to admit that Berkshire’s ability to beat the market by such a large margin is not sustainable as the company gets bigger and bigger. That might be true. But as an offset, things like size, reputation and deep pockets provide a leg up and present financial, cost and investment advantages that Berkshire is able to take advantage of. Mr. Buffett masterfully uses such advantages to his investment benefit (and those who invest with them).

So he is very confident Berkshire will continue to beat the market for a long, long time, and that shares in Berkshire are a great long-term investment. I agree.

Other Related Topics: Berkshire Hathaway , Kent Lucas , Safe Haven Investor , Warren Buffett

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