Where will Berkshire Hathaway stock be in 5 years?

The legendary head of Berkshire Hathaway (BRK.A 0.42%) (BRK.B 0.72%)Warren Buffett is almost unmatched in his investment acumen. You don’t get a nickname like “The Oracle of Omaha” if you’re skinny. Although it sometimes seems like it, his success does not come from guessing the future; it is from adhering to a clear and disciplined strategy and philosophy that guides his every move.

Buffett has his eyes on the horizon all the time. He believes in finding businesses with fundamental competitive advantages — “moats” — and supporting them for the long term. As he said in a letter to shareholders in 2023, “When you find a really great deal, stick with it. Patience pays.”

Berkshire Hathaway is certainly a wonderful business, and patience has certainly paid off. Just a $1,000 investment in Berkshire in 1980 would be worth $2.3 million today. Is it true that we are moving forward? What does the next five years hold for the company? Let’s take a look.

Berkshire’s own businesses are humming along, especially insurance

Berkshire is a conglomerate that owns a portfolio of subsidiaries as well as a portfolio of investments in outside companies, such as its stake in Apple. Although the latter often gets more media attention, the businesses Berkshire controls account for a large portion of its profits.

Berkshire’s subsidiaries cover a diverse set of industries, from energy to manufacturing. Most of these businesses look strong and critical, offer quite a bit of cash, which allows Buffett to be successful on the investment side of the business.

Insurance has long been the backbone of Berkshire, and of late Berkshire’s insurance segment has grown rapidly. Its net underwriting earnings in the first quarter of 2024 nearly tripled year-over-year and nearly doubled year-over-year in Q2 2024. Geico, perhaps the best known of these, is a major part of this increases.

Geico has lately been overtaken by Progressivewhich grew even faster. Berkshire’s vice president of insurance operations, Ajit Jain, pointed to Geico lagging behind in its use of technology as the main culprit. Progressive has made better use of new technologies to manage risk.

The good news here is that management is aware of this and is making efforts to catch up. Geico has seen stellar growth despite this handicap; if it can improve its use of new technologies, the business will be all the stronger. Given that Geico has some of the lowest costs of any major insurer, I think this is a recipe for success in the coming years.

It’s been a big year for Berkshire’s investments

Some big changes have come this year in Berkshire’s core portfolio. The biggest was the sale of nearly half of its stake in Apple, followed closely by the sale of a significant portion of Bank of America position. There were also some acquisitions, but they were completely overshadowed by Berkshire’s disposal of major amounts of its core holdings. The company is sitting on a mountain of cash right now (and much of it held in relatively liquid assets like short-term US Treasuries). Take a look at the wild growth in this reserve over the past year.

BRK.A Cash and Short Term Investment Data (Quarterly) by YCharts.

What does Buffett have up his sleeve? While it’s impossible to know for sure, I think there’s a good chance that Buffett is concerned that the market is a little too hot right now, but he won’t be sitting on that much money for too long. I think it’s safe to say that he and his company are up to something and are gearing up to make a major investment or two. I think he thinks he can find other businesses that will surpass Apple and Bank of America in the years to come.

Buffett’s age is the elephant in the room

Warren Buffett is 94 years old. I think it’s safe to say he won’t be in the driver’s seat much longer. His departure is likely to come within the five-year period under consideration. This will inevitably have an impact on the company because he is unique. However, what he does is not magic. His vision and philosophy are so ingrained in the company that his departure will be easier than some investors fear.

He was never the only guide, especially in recent years. He built the company in tandem with the late Charlie Munger, and the two have trained a team of managers for years, many of whom have had independent control over parts of Berkshire’s portfolio for some time.

I believe the continued strength of Berkshire’s subsidiaries, with major investments likely to come from the current cash build-up, means the next five years will continue to be successful for the company. Even if Buffett leaves Berkshire in the near future, the company’s stock will outperform the market.