As Warren Buffett takes the stage this weekend, it's time to ask if his flagship company is still worth investing in.
The annual meeting of Berkshire Hathaway Inc. has been called a carnival of capitalism. It draws thousands to Mr. Buffett's home town of Omaha, Neb., providing the perfect opportunity to reflect on the great investor's philosophy and where his empire stands now.
Let's start with his philosophy. While it's hard to sum up the man's approach in only a few words, he is well known for buying quality stocks at fair prices and then holding them nearly indefinitely. Mr. Buffett takes a slow and deliberate approach that he likens to lethargy bordering on sloth.
That approach is right up my alley. After all, buying right and sitting tight has many advantages. Some important ones include minimizing trading commissions and deferring taxes.
On the other hand, sloth is deceptively hard to stick with in practice – at least when it comes to investing.
Investors are bombarded with advice that encourages them to trade frequently. To make matters worse, it's now a simple matter, thanks to computers and smartphones, to track every twitch of your portfolio.
The constant updates can be shockingly bad for your peace of mind. While a market surge might put a spring in your step, the downturns can really hurt.
People pay far more attention to losses than gains and the emotional impact of losing a dollar tends to be about twice that of gaining one. As a result, we humans aren't wired particularly well to handle the market's ups and downs.
Take Berkshire Hathaway's stock as an example. It has done exceptionally well over the very long term. Mr. Buffett started buying shares of the company for less than $20 (U.S.) a pop in the 1960s and it's now trading near $161,000 a share.
But the excellent long-term trend hides short-term volatility. The stock lagged the S&P 500 about 49.1 per cent of the time on a month-to-month basis since 1990. It outperformed only 50.9 per cent of the time when measured one month to the next.
Throw in the human tendency to feel losses more dramatically than gains and owning Berkshire could have been a disturbing experience for anyone who was following it day to day. The real pleasure – and profits – accrued only to those who could keep their eyes focused on the long term.
All of this helps to explain why Mr. Buffett isn't glued to a computer terminal all day. Like many value investors, he works on a very long term time scale. If your favourite holding period is forever, there is no need to check your performance every second of the day.
But, speaking of long-term performance, it's worth considering whether or not Berkshire Hathaway itself might be a good value for patient investors.
The sage himself recently announced that Berkshire Hathaway would be willing to buy back stock at 1.2 times book value, or about $137,000 per class A share ($91 per class B share). The stock currently trades at about an 18-per-cent premium to the buyback level, which makes it more of a hold than a buy based on Mr. Buffett's own metric.
While Berkshire Hathaway's long-term record is great, the firm's stupendous size makes it impossible for it to grow nearly as quickly as it did in the past. In addition, Mr. Buffett is getting on in years and, at the ripe old age of 82, he won't be around for ever. On the other hand, the firm owns a collection of wonderful businesses that are likely to do well for a long time to come and, perhaps, deserve a more substantial premium.
On balance, I won't be rushing out to sell my Berkshire Hathaway shares and the firm can still do reasonably well over the long term. Mr. Buffett should also have a few more productive years left in him – even if he takes on a more advisory role in the future. On the other hand, I don't expect to add to my position either. Instead, I'll take a page out of Mr. Buffett's playbook and opt for a touch of sloth with this one.