Berkshire Hathaway: Buy, Sell or Hold?

There’s a reason almost everyone who follows the stock market is familiar with Warren Buffett. Not only is he one of the greatest investors of all time, but also a long-term stock in his holding company, Berkshire Hathaway (BRK.A -0.99%) (BRK.B -1.18%)it turned out to be one of the best investments ever. During the nearly 60 years he was at the helm, Berkshire’s stock rose at an annual rate of about 20%.

For decades, all an investor had to do to generate massive wealth was invest with Buffett. But is it still valid today?

2 things to know about Berkshire Hathaway today

The first thing investors need to understand is that Berkshire Hathaway is not immune to the law of large numbers. What does this mean? Simply put, a business with a million dollars in sales has more opportunities to double its sales than a business with a billion dollars in sales. Similarly, companies that are valued at $100 million will find it easier to double in size than those valued at $100 billion.

With a market capitalization that recently surpassed $1 trillion, Berkshire is one of the largest companies in the world. The value of the entire American economy, for reference, is almost 29 trillion dollars. Berkshire’s cash stock alone reaches $277 billion. Berkshire has made its name through smart acquisitions and smart investments for decades, but even Buffett admits that Berkshire’s opportunities are diminishing as the company grows. “There are only a handful of companies left in this country capable of really moving the needle at Berkshire, and they’ve been taken over endlessly by us and by others,” Buffett recently explained, adding that this size allowed for “no possibility of an eye… outstanding performance.”

Simply because of size, it will be more difficult for Berkshire to beat the market as easily as it has in the past. But that doesn’t mean Berkshire can’t still beat the market by a smaller margin.

This is the second thing every investor needs to understand: Berkshire is far from a dead investment. It has outperformed the S&P 500 over the past one-year, three-year, five-year and 10-year periods. There’s a good reason for this continued performance: Berkshire’s business structure is designed for it.

At the heart of the Berkshire empire is a portfolio of insurance companies. These insurance companies generate high levels of float, which is the excess cash that insurers have after collecting policy premiums but before claims force them to pay out that capital. This float gives Berkshire investable funds that it can deploy regardless of what the markets are doing. It’s a big plus to have what Buffett calls “permanent capital”—that is, a pool of money that’s always available to be invested in new investments, especially when valuations crash and outside capital dries up.

That structural capital advantage isn’t going away anytime soon, and neither is the proven investment appetite of Buffett and his lieutenants — some of whom have spent years learning from Buffett. The only challenge has been size, but recent results show that Berkshire’s run is far from over.

BRK.B Total Return Level data by YCharts

Should You Still Be Buying Berkshire Stock Today?

The simple answer is that there has never been a bad time to buy Berkshire stock in the past, and that remains true today. Of course, even the valuation of a high-quality business can end up being too high. But Berkshire’s valuation is more than reasonable. The stock is trading at just under 1.7 times book value, which at first seems expensive compared to Berkshire’s history. Never in the last decade has a stock traded at such a high price. However, Berkshire has spent nearly $80 billion to buy back its own stock since 2018, an act that has increased shareholder wealth while artificially reducing book value. A slight adjustment for this suggests that Berkshire stock is simply valued at the upper end of its historical range.

Is Berkshire stock a steal at today’s prices? For patient investors, yes. Paying a bit of a premium for one of the best companies on the stock market will likely prove smart for long-term shareholders. But like any stock, Berkshire’s short-term valuation could plummet at any time, especially if stocks generally fall. Berkshire stock is still a buy, but it’s more important than ever to maintain a long-term investment horizon.