Is Berkshire Hathaway stock a buy?

It’s a question that’s been asked over and over for decades: Is it too late to buy stocks? Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.96%)? As you probably already know, Berkshire has been one of the best performing stocks in history. Stocks have averaged annual returns of around 20% for decades. Even a small initial investment would have turned into a fortune with this powerful stock.

Are you too late to the party? The answer might surprise you.

New Berkshire investors need to understand this 1 factor

Under Warren Buffett’s steady guidance, Berkshire has developed several key strengths that have allowed it to beat the market far more than anyone anticipated. At the core of its outperformance is a skilled investment team that has proven it can make long-term bets that outperform broader market indices such as S&P 500. from Coca cola and American Express TO Amazon and AppleBuffett and his lieutenants have repeatedly succeeded in identifying and investing in some of the greatest brands in history.

But investment acumen isn’t Berkshire’s only advantage. The holding company also has a structural capital advantage that allows it to deploy capital even when markets turn sour, valuations fall and external sources of capital dry up. That’s because Berkshire owns a large portfolio of insurance carriers that generate excess cash regardless of market conditions.

Insurance companies collect cash when premiums are paid, but only have to give up that cash when a policy claim is made. In the meantime, insurers can keep the money interest-free. Buffett realized decades ago that, thanks to the stability of the insurance markets, he could invest that cash at high rates of return regardless of what the stock markets were doing, providing a structural capital advantage that few investors are aware of. joy.

For these reasons, Berkshire remains an excellent option for patient investors looking to outperform the S&P 500 over the long term. There’s just one problem: Berkshire isn’t what it used to be. The core business model is still intact, but the company’s valuation has grown to over $1 trillion. There simply aren’t many investments that Berkshire can make right now that will move the needle.

Only a handful of companies in existence today, mostly in the US, are large enough to have a sizeable effect on Berkshire’s gigantic portfolio. “Outside the US, there are essentially no candidates that are meaningful options for the deployment of capital at Berkshire,” Buffett recently pointed out. “All in all, we have no possibility of a stunning performance.”

Is it too late to invest in Berkshire?

Before investing in Berkshire stock today, there are three major factors to consider. First, Berkshire’s structural capital advantages, plus the core investment team responsible for its historic success, are still in place. Second, due to its sheer size, these advantages won’t result in the amazing performance we’ve seen in the past. Ultimately, Berkshire’s current valuation doesn’t offer much to get excited about. The stock is now trading at a book price valuation not seen in years.

Should the combination of these factors scare you? Not so fast. There is reason to remain optimistic.

BRK.B Price-to-book value data by YCharts.

It’s true that Berkshire’s huge returns are probably a thing of the past, and its current valuation is clearly not attractive. But over long periods of time, paying a small premium for a high-quality company is usually worth it because that premium can be spread over many years, if not decades. What remains, then, is a blue chip stock with structural capital advantages still in place, even if those advantages are weaker than in the past.

Will Berkshire stock beat the market by leaps and bounds over the next decade? Probably not. But it still has an above-average chance of beating the market by some margin, even if it’s a slim win. Throughout its history, there’s never been a bad time to buy Berkshire stock, as long as you’re committed to holding the stock for the long term. The same is probably true today, despite the company’s reduced advantages.