Berkshire Hathaway: Buy, Sell, or Hold?

Nearly every investor knows about Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) and its iconic leader, Warren Buffett. Over the decades, Berkshire has generated average annual results of roughly 20%. Few investments over that time period can match that performance.

Only one question remains: Is it too late for your portfolio to take advantage? The answer may surprise you.

This is why Berkshire Hathaway is a winner

Before we assess whether Berkshire stock is still a buy, it's important to understand why the company has performed so well for more than a half-century.

There are several factors that differentiate Berkshire from the competition. The biggest is its capital allocation strategy. At the core of Berkshire's operation sits a portfolio of insurance businesses. Insurers write policies, and collect premiums in return. When a claim is filed, the insurer pays out. Even if the total cash flow in and out nets out to zero, insurers can still turn a healthy profit. That's because they're able to invest those premiums until a claim is filed, earning "free" interest in the meantime.

Traditionally, insurers were very conservative in their underwriting practices, as well as the investment choices used for investing "free" capital. Buffett shook up the industry when he realized he could be more aggressive, underwriting even more policies and investing the proceeds in higher-return asset classes. In a nutshell, owning a portfolio of insurance businesses gave Berkshire access to a stable, low-cost source of permanent capital -- an advantage that continues to this day.

But of course, having a bunch of capital to invest doesn't guarantee positive results. You'll also need a savvy investing team to put that capital to work. In this regard, Warren Buffett is one of the best of all time. His investing acumen -- as well as that of his team -- is largely unrivaled. In combination, Berkshire's capital advantages plus Buffett's investment skills are the biggest factors behind Berkshire's incredible long-term success.

2 reasons why you're not too late

On paper, Berkshire stock doesn't look like a bargain. Shares trade at 1.6 times book value -- the upper end of their 10-year trading range. Plus, Buffett has come out recently warning investors not to expect "eye-popping returns" in the years to come.

Yet take a closer look and you'll discover two reasons why now -- just like nearly any time in the past -- Berkshire stock is still a buy for most investors.

BRK.B Price to Book Value data by YCharts

First, Berkshire's book value is artificially understated due to share buybacks, which tend to depress book value despite boosting shareholder value over the long term. This effect is especially true in this case considering Berkshire executed its massive share buybacks at stock prices much lower than today's.

Second, Berkshire's structural advantages are here to stay. Its capital allocation strategy remains in place, and Buffett has positioned several trusted investing professionals -- some of whom have been at Berkshire for decades -- to manage Berkshire's investment portfolio in the decades to come. In fact, some of his investing lieutenants like Ted Weschler and Todd Combs are already responsible for some of Berkshire's biggest bets this century. So even after Buffett's passing, don't expect much to change.

Is Berkshire stock a screaming buy right now? Likely not. If you're looking for a promising short-term bet, Berkshire isn't it.

But if you're willing to remain patient, Berkshire's current premium can be spread out over your entire holding period. After several decades, or even a handful of years, this premium will average down to nearly nothing. And what you're left holding is one of the highest-quality businesses on the market, with structural competitive advantages that won't disappear anytime soon, whether Buffett is at the helm or not.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

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Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 18, 2024

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.