Berkshire: The Hedge for an AI Boom or Crash

$Berkshire Hathaway-B (BRK.B.US)$ , one of the most well-known conglomerates in the world, led by Warren Buffett, it has a solid track record, a diversified portfolio, even managing to beat the S&P 500 returns which most hedge funds fail to even come close to. It is an actively managed fund that behaves more like a passively traded fund, with no management fees.

TL;DR : Berkshire overvalued but good defensive investment (energy &insurance), Future leader Greg Abel capable, buy and hold for more than 10 years to huat. (p.s. Read conclusion at bottom as well)

For example, from 1965 to 2023, the company's stock has compounded at an average annual rate of about 20%, significantly higher than the S&P 500 historical return of around 9-10%.

Berkshire Hathaway is also well diversified, owning a wide range of stock sectors, including insurance companies like GEICO, BNSF railway, utility companies, and consumer goods companies like Duracell, Fruit of the Loom and Jazwares.

Some of the companies they own that I have an interest in; $Apple (AAPL.US)$ , $American Express (AXP.US)$ , $Chevron (CVX.US)$ and $Occidental Petroleum (OXY.US)$ , $Citigroup (C.US)$ , $Visa (V.US)$ and $MasterCard (MA.US)$ , $Amazon (AMZN.US)$ .

This ample amount of diversification amongst various sectors provides protection for Berkshire during sector crashes, but also means they don’t benefit from huge booms like the tech and AI stock boom. But people seeking to buy Berkshire aren’t looking for explosive gains but decent stable growth.

Warren Buffet the head of the company is known for his disciplined approach to capital allocation, investing in stocks he believes are undervalued, and a preference for investing in companies with a durable moat.

Berkshire also has been holding onto a large cash reserve, sitting in Money Market Funds and bonds, which they can use at any time to execute on market opportunities and buy shares when they have been oversold.

Criticism

While Berkshire’s significant cash reserves provide flexibility, some investors argue that the company holds too much cash, which could be deployed more effectively for growth. Critics sometimes point out that the company’s cash pile is not being fully utilized, especially in a low-interest-rate environment.

Unlike many mutual funds or hedge funds, Berkshire Hathaway doesn’t charge management fees. As a result, shareholders keep a larger portion of the returns generated by the company’s investments. Berkshire also does not pay any dividends, which is great for Singaporean investors, we do not pay a 30% withholding tax, and all dividends end up being reinvested into the company

Warren Buffett is in his 90s. While the company has made plans for succession, there is some uncertainty about how the company will perform without them at the helm.

The company’s management style and investment strategy have been so closely tied to Buffett’s personality that a change in leadership could affect investor confidence.

Buffett's Endorsement: Warren Buffett has repeatedly expressed confidence in Greg Abel and has said that he is prepared to step down if needed, and he trusts Abel to handle leadership responsibilities.

If you are feeling skeptical about Abel's abilities here are some of the investment decisions that Abel oversaw;

He helped buy MidAmerican and transitioned it into Berkshire Hathaway Energy which contributes to about 7.89% of the company's revenue.

Abel also personally pushed for the expansion into renewable energy like wind and solar. Abel also acquired several other energy sector companies like PacifiCorp and NV Energy. Abel's specialty comes from his background in energy sector and he has definitely showcased his expertise on the matter. While Berkshire under Buffett has intentionally avoided taking part in much of the AI chipmaker boom, I think its energy investments are a safe hedge. Tech companies and users will always need large supplies of energy whether during their good years or bad years, and Berkshire shall steadily profit from that growth.

Technical Analysis:

Right now Berkshire is trading at a slight premium, due to the reputation the company has created from its track record, investors do not mind paying the premium, and as long as Berkshire continues to perform I doubt this will change.

At 20 to 25 PE the stock is even high for Warren who typically goes after stocks trading below a 15 PE.

It's Book value per share is also 437 which is quite a bit under its shareprice, which tells us its overvalued. Its PB ratio is about 1.63 which tells us it's trading at about a 60% premium for a value investment.

CONCLUSION

For me personally, I use Berkshire like a tax free, accumulating S&P500 ETF since I don't have the means to affordably invest into CSPX. Its definitely ad defensive investment because of its majority insurance holdings. So all in all I don't mind buying this stock at a premium since my horizon is to hold for 15 or more years. However I will be honest and say that my DCA amount is 2 dollars a day, if Berkshire drops close to its fair value, I will up my amount to 5 or 10 dollars a day.