History shows that investors would make a wise decision by purchasing it Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). But that’s only true if you buy it and keep it for a longer period of time. And that can only happen if you understand what you have purchased and are willing to stick with the investment no matter whether there are good or bad markets. Like any investment, Berkshire Hathaway is not the best choice for every investor.
Here are some reasons why you might not want to own the stock.
Berkshire Hathaway has an incredible track record
Before we delve into the negative aspects, it is important to talk about a very notable positive aspect. In the long term, investing in Berkshire Hathaway has hurt the performance of the S&P 500 Index. The chart below shows total return, including reinvested dividends. So when you look at the historical results, you’ll be very attracted to Berkshire Hathaway, and for good reason.
This achievement was largely due to world-famous investor Warren Buffett. Although Buffett is not infallible, his long-term approach has clearly worked. From an overall perspective, his investing style boils down to buying good companies when they appear to be cheap or cheap and staying with them for the long term. Buffett allows the management teams of the companies he invests in to operate largely autonomously unless there is a very good reason for him to get involved. He tends to favor companies that generate reliable cash flows, which he uses to invest in other investment opportunities.
So far there is nothing wrong here at all. For many investors, owning Berkshire Hathaway would be a good decision. But not for every investor.
Berkshire Hathaway does not pay dividends
In the above comparison with the S&P 500 Index, the performance figures include reinvested dividends. That’s a benefit for the S&P 500, but it has no impact on Berkshire Hathaway’s performance since the company doesn’t pay a dividend. Although Buffett likes to own cash-rich companies like utilities, pipelines, and rail lines, he also likes to hoard that money so he can use it for investments. At the end of 2023, Berkshire Hathaway had $33.6 billion in cash and another $129.6 billion in short-term investments on its balance sheet.
There are three problems here. First, if you’re investing for income, owning a stock that doesn’t pay a dividend doesn’t make much sense. Second, cash that is basically sitting around just earning interest (and Berkshire currently has a lot of cash doing just that) is a drag on performance given the higher returns that would likely result from investing that cash in operating assets . Third, even though Buffett has a long history of successfully investing on behalf of others, you trust that Buffett and his team will continue to operate at this high level.
Many investors prefer that a company pay dividends so that shareholders can decide what to do with the money, rather than management. If you think like that, Berkshire Hathaway is not for you.
Berkshire Hathaway is very complex
It’s also important to understand how complex Berkshire Hathaway is. Although it is a single company, it is a conglomerate that is involved in a variety of businesses. Some of these companies are just stock investments Coke (NYSE:KO) or Occidental Petroleum (NYSE:OXY), while others are wholly owned investments, such as the insurance company Geico or the Burlington Northern Santa Fe Railroad. But the last two are just a few examples of wholly owned companies. Berkshire Hathaway owns companies involved in retail, chemicals, energy, manufacturing and more.
It would be virtually impossible for an investor to track the performance of all of the companies that Berkshire Hathaway owns or invests in. In some ways, the stock is almost like a giant mutual fund. In other words, you have to trust that Warren Buffett and his team will do the right thing. That may sound easy given the stock’s strong long-term performance, but Berkshire doesn’t always outperform the market.
As the chart above shows, Berkshire Hathaway significantly underperformed the S&P 500 index after emerging from the coronavirus pandemic. This is, of course, a cherry-picking period, but one would have had to trust that Buffett and his team would make good decisions over the long term to sustain this period of underperformance.
Berkshire Hathaway is the product of one man’s vision
This last point is a bit tricky. Although Buffett has a team around him, Berkshire Hathaway is actually an entity of his creation. It is his ethos that influences the decision-making process. With the death of his longtime partner Charlie Munger, the question of whether Buffett is able to maintain control has become far more important. For better or worse, the time is approaching when Warren Buffett will no longer be the heart of Berkshire Hathaway.
There is no way to know what will happen after this point. The company might just keep going strong, it might fall apart, it might start to crumble, it might start paying dividends – who knows? The post-Buffett future is uncertain at best. Very conservative investors may want to avoid the risk of buying Berkshire Hathaway, thinking it is one company, only to find that it turns into an entirely different company after Buffett leaves the helm.
It wouldn’t be a mistake to buy Berkshire Hathaway, but…
You can’t say that buying Berkshire Hathaway is a miscalculation. In fact, history shows that buying it would be a very good decision. However, the stock will not be suitable for all investors. If you like dividends, Berkshire Hathaway won’t be for you. If you like simple shops, you shouldn’t buy it. And you have to realize that the long-time CEO will have to hand over his job to someone else sooner rather than later. You may want to monitor the succession process from the sidelines to see if the company changes in any way before adding it to your portfolio. Simply put, no company is perfect for every investor.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Berkshire Hathaway is great. Here’s why you shouldn’t buy it. was originally published by The Motley Fool