Episode 19 | Berkshire Hathaway: Business, Balance Sheet, and Buffett’s Legacy

In Episode 19 of "Market News with Rodney Lake," Rodney Lake, Director of the GW Investment Institute, dives into Berkshire Hathaway’s current standing, exploring its extensive collection of businesses, financial strength, and unique decentralized management model. Lake evaluates Berkshire’s strategic capital allocation under Warren Buffett, discussing the challenges and opportunities of maintaining growth at such scale. Rating key aspects like the business portfolio, management, valuation, and balance sheet, Lake gives Berkshire an overall score of 8, raising important questions about succession and the company’s future. Don’t miss this look at one of America’s most iconic companies!

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. Today we are coming to you live. Not necessarily live, but we are here in the Duquès Innovation Studio and Duquès Hall at the GW School of Business.

Welcome back to those that are coming back. And welcome to those new people watching and listening to the episode. Today is a very special episode where we're going to talk about Berkshire Hathaway. You've probably heard about this company. This is one of our large positions in the portfolio at the GW Investment Institute. So we're going to talk about it.

So just as a reminder disclaimer this is not investment advice. This is for educational and entertainment purposes only. Now with that said let's get into it. So you've heard of Berkshire Hathaway who runs it. You've probably heard of this person too. His name is Warren Buffett. And until recently the co the co-chair of the company is Charlie Munger was Charlie Munger.

He recently sadly passed away at 99 years old. Obviously a great run. Very sad by that. However, you know, 99 years old, the full life and big contributor to building great value for that company and building a great life in general and family. So back to Berkshire. Well, Berkshire and its modern form, which is quite old at this point.

That was taken over by Warren. So he didn't actually found the company. The company was a textile company. And we're not going to dive deep into this episode into a lot of the background. We'll mention a couple of things, but Buffett took over this company, way back when. You know, 50 plus years ago, they made linings for suit jackets as an example.

And then, you know, they really tried to, you know, reestablish the company's, base and really, you know, rework it. But, you know, it was a business that was not working in any case. You know, Buffett turned it into this holding company for himself, a publicly traded holding company. An important part to mention about that is this release or this provides for the opportunity to have permanent capital.

You might have heard us talk about permanent capital before, when we had Mr. Ramsey on the episode. When you talk about permanent capital, for the Investment Institute. It's important here because people cannot redeem then. And so if you're a publicly traded company, if you're unhappy, for example, with the way that Buffett is managing the company, when you sell shares, it doesn't redeem it out of their balance sheet.

As an example, as opposed to a fund where you actually have to go out and sell things, to make those redemptions. As an example. But in this structure, when you have a publicly traded company, Buffett has the opportunity to then manage that money on a on a permanent basis. And so if people get excited or nervous or overly optimistic, it doesn't have a real impact on the way that he manages it.

And that's one of the great benefits, to this set up in this permanent capital structure. So, it's possibly sometimes an imperfect vehicle, to the, to do this money management sort of thing. But for the underlying investor, you're basically at this point getting a fund, that you have no fees on. And so you buy the shares and you hold them and let Warren do his thing.

But now Berkshire is a conglomerate. It owns a variety of different things, and it has holdings. You know, some people call it kind of the, you know, best of the S&P 500 plus with a great money manager on top of it. But they have lots of publicly traded companies. Apple being one of the biggest ones that we've talked about that before or is the biggest one in their portfolio.

But they have other great companies that people have heard of, like Coca Cola and American Express, that they've owned a long time. They've been recently selling shares of Bank of America, but they own big chunks of these companies, nonetheless. But they also have operating companies. Insurance, as you might know, is one of their biggest operations. And Geico is probably the most public, version of that, but they have other ones.

And they just acquired Alleghany not that long ago as an example. So they have specialty insurers. They have the car insurance, National indemnity, long ago as an acquisition to help build that insurance empire. And they get this so-called float. So the the time between when they collect premiums and have to pay that out, they get to invest that money and they invested in these operating companies.

And as we talked about, they bought Burlington Northern Santa Fe. And so it is a wide ranging company with a diverse set of operations in Berkshire. Any energy would be another big one. And so today we're not going to go over each one of those individually. It is important to understand that is a collection of businesses that Buffett has been acquiring over time.

And they've been buying out as much as they can each time 100% of these companies and some have been better than others. Geico would be an example of one that's done fabulous. And it's been a great business over time. But when you're buying Berkshire where buying shares in Berkshire, what are you buying? Well, one, let's just tackle the share price because sometimes that throws people off.

Now, you know, it's nearing $700,000 per share on the shares. The B class shares are one, over, you know, 1500 or to say another way, 1500 times, a B share is an A share. And so a lot of people are not going to buy the shares if they're not going to put that much money, if it's a retail investor into one, shares of a company.

But for those who bought long ago and hold those, shares, obviously it's been a tremendous increase in value. And those, those run, pair pursue alongside each other as far as the value of the total business. So when and now. Okay. Well, let's just look at the market cap of the, of the business. So Berkshire is the largest non-tech company out there right now.

And so, as of, you know, today, let's get get a, market cap for you. You're just shy of $1 trillion. So 981, billion dollars market cap. So, again, they're not the largest non-tech company. The only other companies that are in this stratosphere of either a trillion or approaching $1 trillion are really tech companies. As an example, and this is probably the only really manufacturing insurance company, conglomerate, you know, of this kind that's in, this territory for, for that.

Well, it's very special company, obviously. And again, it's a collection of businesses. So when you're buying the business of Berkshire, what are you actually buying again today. Is that going to be a deep dive. And we might reserve this to do a at another time a deep dive into the businesses, which probably deserves a couple of episodes because it is so diverse.

It is a conglomerate. But when people think about what are you buying when you're buying the business of Berkshire, you are buying the collection of businesses that Warren has put together and his money management skills, along with Ted and Time. And we should mention that we're going to be using the framework for the investment institute, as we do for other episodes business management, price valuation and balance sheet.

So now we're tackling the business. And so the businesses you're getting this collection, you're getting it at no cost as far as the fee goes as compared to buying an index. But you're getting this exposure to great American businesses and they have some exposure to international. Not much. But they have some international exposure and they've been ramping that up, more recently in Japan, as an example, but principally as a percent, percentage wise goes, you're really of a, us based business.

So you're kind of betting on the US economy and you're, you know, getting something that's analogous, let's say, to the S&P 500. But through the lens of what Buffett has collected, in addition to their money management skills, now, that has paid great dividends over time, that actual dividends, because Berkshire doesn't famously pay dividends and has it for a long time, Warren wants to keep that money and redeploy it.

And they've been piling up cash. When we get to the balance sheet, we'll talk a little bit about that. So for the business again, it's a collection of businesses, insurance, manufacturing railroads and Burlington Northern Santa Fe is the railroad that they own as a wholly owned subsidiary. But it is this collection of businesses, again, on top of the money management.

So when you're buying that, you're getting this set. And I think a reasonable way to think about that is that you're getting the S&P 500, you know, sort of that condensed version of that and this curated collection of businesses that Warren has put together at hopefully favorable prices. And over time, it has worked. All right. So let's move on.

To the management. You know, what else can you say about Warren Buffett that hasn't been already said? Lots and lots of things have been said about Warren Buffett. And again, sadly, until recently, Charlie Munger was the vice chair. But now you have people like Greg Abel and Ajit Jain, who runs, Greg Abel runs the operations peace, and Ajit Jain runs the insurance.

And you have, Ted Weschler and Todd Combs on the investment side in addition to Buffett. So there are other people, but Buffett is obviously the star here and has put this company together, over the years again, along with Charlie, who recently passed away. And so what can we say about Warren? Well, now, you know, he's in his 90s, so he's no spring chicken.

And I think he knows that there's succession plans. There are always the question mark over the last few years about what's going to happen on the management side. And so you really start to say, okay, well, Warren, obviously, you know, we'll probably continue to do this as long as he can. And so, you know, we'll see what happens there.

But on the succession side, it looks like Greg Abel is set to take over with a chain running the insurance. And you have Todd and Ted on the, on the investment side, this past, of managers has seem to do an excellent job under his leadership. Now, none of us know what's going to happen once Buffett is gone.

How will this impact the setup? Will it be the same? My personal view again, personal view here. Big disclaimer is that it won't be the same. Now, it could be the same. It could be similar. But, you know, getting these sweetheart deals, as an example, because of this reputation that Buffett and and Munger built over the years, will that translate, to Greg Abel, Ajit, Jane, Todd and Ted?

I'm not sure some of that might translate, but I don't think to the same degree. Now, they have built this wonderful enterprise and this great collection of companies, all together. And so I think there will be some staying power there, but I don't think it's going to be the same. I don't think that they're going to get the same types of deals, especially during pressure situations as Buffett did.

Now, they might get this over time. To be clear, they can build up, their own reputation once they're actually run the company themselves. So that's different. And but that, I think will take some time. Buffett has, you know, famously said that, you know, it takes a lifetime to build a reputation in five minutes to get rid of it.

And this was true, you know, and really talked about when they were having trouble at some brothers long ago. And they really had to really focus on making sure they protect their reputation, and ultimately they did protect the shareholders. Solomon. And cleaning up the mess that they had to deal with at the time. Buffett has been the front person.

Obviously, these people are are working day to day in making things happen. But the management team is definitely secondary to Warren. Right now. And so until they're really out front completely, I think it will be difficult to say, will they get the same type of deals that Buffett has over this? You know, last 50 years, and sometimes that has made the big difference.

Only a few deals. If you've read one of the recent, Berkshire Hathaway letters, what Warren talks about. Well, you know, I've made a bunch of decisions that were okay and didn't really destroy us, but where we really did well, was a few decisions, that I made and a few deals that happened. And so that's what really drove the the growth the over time.

And can this next group do that? Can they breed those same sort of opportunities? Can they continue with this track record? I think it's very challenging to say that they're going to absolutely do that. Can they run the company? Well, absolutely. But are you going to get the same type of returns? I think that's difficult to tell at the moment, and I don't think that they're going to get the same deals.

Moving forward that, that Buffett did. All right. So now with that said, time will tell on the management side. So let's look at the valuation. So this is a company that sometimes is very challenging in some regards to talk about, you know what's the right valuation for this. So you know, when you talk about what's the price to book, as an example for, for Berkshire Hathaway, that's what most people look at.

So if we dive in, you know, to some of the ratios, you know, people like to use PE, but PE is probably not a good thing. But, you know, the current PE, as we talk about this in in late October in 2024 is, is, you know, before it is near 23 times. And so you're a little bit below, the S&P 500.

But when we look at okay, well what is actually, you know, the price to book for this company. And you know, that's probably a better gauge of, you know, this type of company, this holding company, set up with these types of businesses, that live in there. So, you know, when you're talking about. Okay, well, what? You know, what's the price?

The book. So anything above like 1.2 times is probably something that, you know, you want to buy over time and you want to say, okay, you know, is but you know, so you want to make sure that if you train below that, you know, Buffett said that, okay, we're going to be buying back shares. And that's a good thing, you know, but you could probably say that, you know, right now it's fairly valued, right?

Is it is it overvalued? Is it undervalued? Depends. You know, with that metric, if it's at 1.6 times right now book. And so that that would be kind of high. But you could say, well, they own a really high quality collection of businesses and it should trade at a premium. And right now it is and maybe that, that Halo is going to be there for a while and maybe it deserves to trade at at 1.5 to 1.7 times based on the collection of businesses that they have.

But it's hard to say that, you know, it could trade, you know, with a really high multiple, like a tech company as an example, or software as a service company, because it really doesn't have the same type of growth in that margins. And, and really, it's hard to when you think about Berkshire, it's hard to really pinpoint, because it's such a collection of things.

But a lot of these businesses that they own are not high gross margins and high net margin businesses. So it is appropriate to talk about price to book. But when you look at the price to book right now, at 1.6 times, if it falls below 1.2, you know, maybe they're buying back shares, at that point, but at 1.6, maybe it does not make a ton of sense.

But it's also very challenging to say, okay, this is, you know, grossly overvalued. Hard to say that, right. If you've bought Berkshire along the way, you've been served very well and you've made money over time from that, the increase in earnings and the earning power, earning power that's been created for those collection of underlying businesses and that sort of bet on America and bet on Warren and Charlie that has worked.

And now bet on Warren and bet on Greg Abel and AG Jane and and Todd and Ted. And so it looks like, you know, okay, maybe, this is a fair, to a slight premium valuation, to talk about, but it's not something that I think any of us should be really alarmed about. But again, this gets back to the succession planning.

What's going to happen and how might this business be transformed under different leadership? Will they start paying dividends? Will they acquire different types of companies? Will they run the investment portfolio differently than they do now? Will they have more exposure to tech? So that's some of the talk that's been said and maybe it deserves a bigger premium. When you talk about price, the book or even at some point may be looking at a PE but but focusing on price to book maybe will deserve a better premium or higher premium rather at that point if it if its exposure to underlying companies has more tech as an example, in it you know well, if that

happens over time with a different group that's in charge, well, maybe it deserves that. And if it starts paying a dividend, you're going to attract also a different crowd of investors. When you talk about capital allocation for management, you know, as we mentioned it doesn't pay dividends. So that might rewrite the stock depending on what happens, sending cash back to investors directly and that again that may attract a different type of, investor, a retail investor that's interested in owning Berkshire Hathaway.

So let's really look at, now moving on to the balance sheet and we'll, we'll touch on all these, before we wrap up here, just to be clear on where we are and all of them, again, the market cap, you're approaching $1 trillion. They, you know, they're piling up the cash. Now, the cash pile, is sort of enormous.

And when you strip out sort of, what they're doing, you're talking, you know, hundreds of billions of dollars, ready to roll, for Berkshire Hathaway and, and really, I mean, they have a net cash position there is that there are triple AA rated companies. So bulletproof balance sheet. You're not worried about that? A lot of people are worried about okay.

I think there's too much cash that's piled up, in the company. And Berkshire is ready, to, you know, buy things. So if they see something that's happening on the downturn, that's why they want to have all this ready cash available. However, at some point, you know, it might be, you know, reasonable to say, but there's better uses for that capital.

So if they're going to continue to pile up that cash, investors may say, well, why don't you start sending some of that back? Now, the more tax efficient way to deliver that back has been share buybacks. When when they want to deliver that back because it doesn't create a taxable event for their underlying investors. However, you know, you might say, well, now that cash is getting so large it's probably useful to start paying some type of dividends.

That's a reasonable request or a reasonable idea based on the amount of cash. In the growth in earnings that continues to happen, at Berkshire. And again, time will tell. It doesn't seem like Buffett is going to change his outlook on this. And so, you know, is that going to change in the short term? It doesn't seem like it.

Will it change over the next maybe five? And certainly when you talk about ten years time will tell. It depends sort of there when they can redeploy this now because they're so large. They really you know, they talk about having this elephant hunting gun. It really is a big challenge to go out there and find these big acquisitions at the scale that they have and deploy, this capital.

So but the balance sheet is fantastic. You know, rock solid triple A, rated on the credit side, helps you sleep at night. All this cash. We're not worried about that. So now let's let's wrap up here. And again this was not a deep dive into this was a quick overview. Talking about the business, the management, the price valuation of the balance sheet.

So let's now rate each one as we go through this before we wrap up. So back to the business. This is a collection of businesses that's been curated by Buffett. So you're betting on America. You're betting on his ability to put this collection together over time. And then the incentives that drive those businesses highly decentralized. And when we talk about, you know, how do you incentivize those management teams at any company?

The way that it's set up at Berkshire is that, you know, it's decentralized set up, which we didn't really touch on, which we probably should have mentioned during the management, but we'll talk about it here, is that those businesses are, you know, set up to do well when you have this incentive structure in place where the capital allocation is centralized.

But the incentives are decentralized, and these people are rewarded for the work that they do at these underlying subsidiaries. And so the business, this collection, the way that it's set up, you know, probably an average collection of types of companies, you wouldn't say like, oh, there's these superstar types of companies in there. You certainly have some notable ones like, the insurance companies and the Burlington Northern Santa Fe that, you know, can be great companies and see's Candy, but that has limited scale.

So there are some things in there that you would say, well, you know, maybe they're better than average or they're better than their industry, but you wouldn't say that they deserve this magnificent premium, for example, like an Nvidia or a Microsoft or something along those lines. But you could say, well, it deserves better than an average. And so if you're thinking average is five, so maybe the collection of businesses is a seven, and with the way that they've put them together is approaching an eight.

So what kind of 7 or 8 on that? Now we go to management. You know, I'm saying ten. You know, maybe I'm a little bit biased. I'm a big fan of Mr. Buffett and Mr. Munger when he was here and still a fan, now, in any case, and a fan so far of of the group that that's been there managing a Greg Abel and a Jane and Todd and Ted.

So but really, the ten is for Buffett. But for now, they get a ten in my book. And again, that could be a fully by setup. And possibly it is. But I have been a big fan over time, and I've learned a lot from Buffett and learned a lot from Munger. And so I think they'll continue to as long as he's there.

I think that's a ten. Now, real question is, okay, when he's not there, what grade would you give then? I think that then it's still not a ten or it's still to be determined rather. But I would not call it a ten. I think you're kind of seven, 8 or 9 trying to figure out what that is when you have more clarity on the way that the management team after Buffett, after the succession comes in, how they're actually going to run it day to day.

So I think for now that's a ten and could be, you know, TBD, but seven, eight, nine for the next group. All right. Now on the valuation. Well you could probably say that there's again, we talked about a modest premium here, to a slightly higher premium. Where does this deserve to trade this collection of businesses. Again that's curated when you talk about price to book at 1.6, that's high historically for them.

So you could say, okay, well maybe that's a 6 or 7. So not, you know, not fantastic on, you know, we're not getting this cheap or anything like that at the moment. So, you know, let's say it's a, you know, six, seven maybe in that range. Now let's move on. To the balance sheet. That's a ten.

So when you, when you, you know, again, bulletproof balance sheet, we're all sleeping at night. Not worried. So when you add all that up and you weight those individually again depending on when you're coming out, you're still probably talking about Berkshire is an 8 or 9 overall, even considering, some of the challenges that it has, the big questions you have to think about are the succession, which everybody's been focus on for years.

And what does that mean for the type of company that Berkshire will be afterwards? We'll continue to follow this. In Berkshire again. There's one of our largest holdings at the investment attitude. This is not an investment advice, remember. So big disclaimer there. But we're delighted to talk about Berkshire. Delighted to continue to learn from Mr. Buffett and learn from, Charlie Munger.

Over time. We'll continue to learn. We'll continue to invest when thank everybody for their time. And we'll see you back on the next episode of Market News with Rodney Lake. Thank you.

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