Warren Buffett, a legendary figure in the investment world, has garnered a substantial following, making Berkshire Hathaway’s stock a popular choice among investors. The conglomerate is renowned for its investment portfolio and its association with insurance companies. This is largely due to Buffett’s strategy of using the insurance industry’s float to fuel his investments—money that is held until claims are paid out.
Beyond insurance, Berkshire owns a diverse range of wholly-owned businesses, from Geico to BNSF and Fruit of the Loom. This year, the stock has seen impressive growth, rising over 25% and nearing record highs. With such success, potential investors may wonder if it’s too late to buy.
When valuing insurance firms, the price-to-book (P/B) ratio is often used. However, given Berkshire’s diverse portfolio, the price-to-earnings (P/E) ratio is also relevant. Currently, the stock is trading at higher multiples than in previous years. Buffett himself has moved away from using P/B as a benchmark for share repurchases, noting it’s not the best measure of a company’s intrinsic value.
As Buffett approaches his 94th birthday, the question of succession looms. Ajit Jain is set to manage the insurance division, while Greg Abel will oversee investment and capital allocation. Abel has already been involved in managing non-insurance businesses for about five years, ensuring a smooth transition. He’s known to be more stringent with business leaders than Buffett or Charlie Munger were. Though not a seasoned stock picker, Abel’s business acumen is expected to translate into investment prowess. Alongside him, Todd Combs and Ted Weschler have been managing Berkshire’s portfolio for over a decade.
Buffett’s eventual passing may trigger a negative stock reaction, although he believes the possibility of breaking up the conglomerate could increase its value, given that its individual businesses might be worth more separately. However, the extent of the “Buffett premium” in the stock is uncertain, as his departure has long been anticipated.
In conclusion, while Berkshire’s current valuation and Buffett’s advancing age suggest caution, the company appears to be well-structured for continued success beyond his tenure. Although the stock has been a strong performer, potential investors might consider waiting for a price pullback before buying.
Summary:
Warren Buffett’s Berkshire Hathaway has seen significant stock growth this year, but potential investors should consider its current high valuation and Buffett’s age before buying. The company’s diverse holdings and succession plan position it for long-term success, though it may react negatively to Buffett’s eventual departure.
