Warren Buffett’s Berkshire Hathaway: A mutual fund…

The other day, I checked my surrogate fund. I knew he held three types of investments: 1) private operations, 2) publicly traded stocks, and 3) cash. As a former fund analyst, I had standard occupation questions. What was the asset allocation of the investment? In addition, what was the price of the securities in its portfolio – in particular, the price-to-earnings ratio?

To my surprise, I could not find this information. Google searches turned up several articles that looked at Berkshire Hathaway’s filings, but since none noticed the format above, none answered my questions. Thus, this column.

Read more: How to invest like Warren Buffett

Asset Allocation of Berkshire Hathaway

Unlike most mutual funds, Berkshire Hathaway is leveraged. However, its borrowing is implicit rather than explicit. When funds borrow, they do so conventionally by taking out short-term loans and investing those proceeds. The same process applies to corporations that issue debt to finance their operations. Berkshire Hathaway, however, achieves its leverage not by borrowing from the parent company, but by investing the loss reserves of its insurance subsidiaries.

According to Morningstar’s Greggory Warren, who helped with this section of the analysis (I can’t be trusted to dissect the insurance company’s finances), Berkshire Hathaway currently has loss reserves of $175 billion (134.4 billion of pounds sterling) related to its insurance operations. Against that liability, it holds $241 billion in fixed-income securities and cash, most of which is T-bills, in its insurance operations. It holds another $48 billion in cash across its other businesses. Its net cash position is therefore $114 billion—a substantial amount, but, as we’ll soon see, nothing remarkable by mutual fund standards.

The company’s portfolio of publicly-traded available-for-sale shares was worth $267 billion as of last Friday. Added to net cash, the amount is $381 billion. Since Berkshire Hathaway’s market capitalization is $958 billion, its private businesses account for the difference. The market values ​​them at $577 billion. (Later, we’ll see the amount of earnings these businesses generate.)

The chart below restates these figures as percentages.

Unremarkable. Once Berkshire Hathaway’s insurance liabilities are offset from its cash position, the company’s asset allocation closely resembles that of a typical stock fund, if a little more cautious. It has 88% of its assets in stocks (both private companies and publicly traded stocks), in a well-diversified portfolio that contains more than 100 positions, counting both its public and private holdings. Of the former, only Apple (AAPL) accounts for more than 5% of Berkshire’s total net assets. (The stake is currently at 9%, down sharply from previous levels, as Buffett recently sold 506 million shares.)

Characteristics of the Berkshire Hathaway portfolio

The company’s industry exposures need little explanation. Besides Apple and a small acquisition of Amazon.com ( AMZN ), Berkshire Hathaway is limited to traditional businesses such as insurance, consumer services, rail and energy. As is well known, Buffett wants investments that generate cash today, not promises of what it will bring tomorrow.

More interesting than the activities of Berkshire Hathaway’s companies are their prices. After all, their operations are very consistent. Even apparent newcomer Apple has been selling consumer electronics for nearly half a century. (See’s Candies, featured in this column just two weeks ago, is even older.) However, the price investors will pay for those activities varies over time.

Given that Buffett buys mature companies rather than startups, the most appropriate valuation criterion is the price/earnings ratio. How much is each dollar of corporate earnings worth?

With the stocks listed, we cross-referenced Berkshire Hathaway’s most recent Form 13F with trailing 12-month earnings reported for those companies in Morningstar’s equity database. Easy enough!

However, assigning a P/E ratio to Berkshire’s private businesses has proven more difficult, not only because you have to remove investment earnings from Berkshire Hathaway’s officially reported earnings, but also because its Geico subsidiary receives separately reported investment income . Should this money be eliminated as well, since its amounts depend on the fortunes of the markets, or should it be considered a normal part of Geico’s operations?

I split the difference and did the math both ways. The following chart shows four different P/E ratios: 1) the 100 largest US stocks, 2) Berkshire Hathaway’s public stock portfolio, 3) Berkshire Hathaway’s private businesses, including the investment income of its insurance subsidiaries, and 4 ) private businesses of Berkshire Hathaway, excluding income from insurance investments.

In all cases, the ratios were calculated by dividing the total market capitalization for each group by its total revenue, using (as noted previously) the last 12 months for public stocks and fiscal year 2024 for private companies. If the companies suffered losses, they were included in the calculations, although since the organization is Berkshire Hathaway and the investment manager is Warren Buffett, few such businesses were found.

Note: Because space is tight, I’ve inelegantly labeled the P/E ratio for Berkshire Hathaway’s publicly traded stock as “BH Public,” for its private businesses, including Geico’s investment income, as “Private Da,” and for its businesses private, excluding that income as “Private No”. My apologies for the clumsy wording.

A long, long time ago, Buffett stopped being a value investor, instead looking for what he considered great companies at good prices. It’s not for me to say if he currently owns any big companies (other than See’s, that is). But their prices are definitely moderate. If this were a fund, Morningstar would classify its portfolio as large (or possibly mid-cap).

Buried in the exhibit is Apple’s P/E ratio of 34. No surprise, then, that Buffett has aggressively sold the stock since the end of 2023. Whatever the company’s qualities, it doesn’t fit Berkshire’s normal price profile Hathaway.

conclusion

This is where I usually give my opinion. Not today. Since I own Berkshire Hathaway stock, I will keep this article descriptive rather than prescriptive. As always, though, you’re free to draw your own conclusions!