Over the weekend, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) reported a nearly $50 billion loss for the first quarter of 2020. Berkshire Hathaway stock dropped this week following the report. Shares are now down 23% in the past month.
For decades, Berkshire Hathaway stock has consistently outperformed the S&P 500. Opportunities to buy the stock on a dip are few and far between. As such, investors who wish they could invest like Warren Buffett should be scooping up Berkshire shares hand over fist.
The Numbers
Sure, that $50 billion loss number may sound scary for Berkshire Hathaway investors, but it’s not nearly as bad as it seems.
These losses are simply paper losses for Berkshire, not actual losses. An accounting rule requires the company to report quarterly changes in the company’s stock holdings as profits and losses. Buffett downplays these numbers because he has always had an extremely long-term investment horizon.
Instead, Buffett prefers to focus on quarterly operating profit. Berkshire reported $5.9 billion in operating profit in the first quarter, or about $3,619 per class A share. Berkshire also has $137.3 billion in cash. Buffett has been constantly nagged in recent years about Berkshire’s cash position. Why isn’t he making any deals? Buffett says he just hasn’t seen anything he likes.
“You could come to me on Monday morning with something that involved $30 billion or $40 billion or $50 billion. And if we really liked what we were seeing, we would do it,” he said this weekend.
Why Berkshire Hathaway Stock Is Unique
In the past, I’ve often written about Berkshire Hathaway stock and why it is unique. Everyone is always praising Buffett’s track record and envious of his success and fortune. If only I could invest like Buffett, they say.
I’ve got some good news for you. You don’t have to understand Buffett’s methodology. You don’t have to have his genius. Investing like Buffett is as simple as typing in the Berkshire Hathaway stock ticker and clicking “buy.”
If you’re looking for the single best stock in the market today, let Buffett tell you exactly what he thinks: “I happen to believe that Berkshire is as about as sound as any single investment can be in terms of earning reasonable returns over time.”
Don’t overthink it. If you want to be like Buffett, buy his company and let him do the heavy lifting. In a very real way, it’s like having Warren Buffett himself manage your investment portfolio free of charge. By buying Berkshire Hathaway stock, you essentially own every stock he buys in real time, even before the public knows he bought it.
How to Value Berkshire Hathaway
There’s a reason why I chose 10 years as an appropriate time horizon for owning Berkshire Hathaway stock. Buffett once said not to buy a stock for 10 minutes that you wouldn’t want to hold for 10 years. He probably didn’t mean literally 10 years. But he has held plenty of stocks for much longer than 10 years, such as Coca-Cola (NYSE:KO) and American Express (NYSE:AXP).
Buffett is no longer a spring chicken at age 89. There’s a good chance he won’t be running Berkshire in 2030. However, Buffett has essentially signed off (directly or indirectly) on everything Berkshire owns today. To me, that’s essentially Buffett signing off on all those stocks for at least 10 years.
But some value investors aren’t content with just blindly putting their trust in Buffett. Former hedge fund manager Whitney Tilson recently crunched the numbers on Berkshire. Tilson assumed a 10% decline in 2020 operating income and applied 11 times pre-tax multiple to Berkshire’s A-class shares. After adding in the company’s cash position, he arrived at a $373,000 price target. For us plebeians that own B-class shares, that translates to $248.66, or about 41% upside.
Of course, that’s how Tilson values Berkshire today, not 10 years from now.
Back in March, Tilson explained why Berkshire is the best retirement stock in the market.
“It’s an incredible collection of high-quality businesses… it’s run by the greatest investor of all time… and it has the ultimate, Fort Knox-like balance sheet,” Tilson said.
I couldn’t agree more.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long BRK.B stock.