Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA, and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Tuesday, October 1, 2024. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Berkshire Hathaway — A Conglomerate of Diversified Holdings as a Fund

Berkshire Hathaway and Warren Buffett are closely followed by investors, who are primarily interested in Berkshire’s stock investments, which are largely managed by Buffett and a few of his colleagues. Additionally, Berkshire Hathaway, as a business, frequently draws significant attention and discussion.

In this article, we aim to explore the concept of treating Berkshire Hathaway’s stock (BRK-B or BRK-A) as a fund within an asset allocation portfolio, examining the rationale behind this approach as well as its pros and cons.

Background

MyPlanIQ’s portfolios are essentially asset allocation portfolios constructed from ETFs or mutual funds. These funds are diversified and typically represent specific asset classes such as U.S. stocks, REITs, and others.

However, some portfolios also incorporate sector or style funds (large, mid, or small-cap). While these portfolios can offer higher returns, they come with increased volatility.

Technically, Berkshire Hathaway common stock (BRK-A or BRK-B) represents shares in Berkshire Hathaway Inc., a single company. However, as we will soon see, this company owns a highly diversified range of businesses and is, in fact, a conglomerate. Its structure resembles that of an investment fund, but with far greater flexibility in financing, investing, and business operations.

Berkshire Hathaway: a diversified holding company

As of the most recent reports, Berkshire Hathaway directly owns over 60 subsidiaries spanning various sectors, including finance, transportation, industrials, energy, materials, consumer discretionary, consumer staples, and utilities. In addition, it holds significant stakes in approximately 40 publicly traded companies, with Apple being its largest holding in the information technology sector. This extensive range of businesses makes Berkshire Hathaway highly diversified. Below is a list of its subsidiaries:

Insurance (7)

  1. GEICO (auto insurance)
  2. Gen Re (reinsurance)
  3. Berkshire Hathaway Life Insurance Company of Nebraska (life insurance)
  4. Berkshire Hathaway Life Insurance Company of America (life insurance)
  5. National Indemnity Company (reinsurance)
  6. Columbia Insurance Company (reinsurance)
  7. Berkshire Hathaway Specialty Insurance (specialty insurance)

Railroad (1)

  1. BNSF Railway Company (railroad transportation)

Utilities (6)

  1. Berkshire Hathaway Energy (BHE) (energy holding company)
  2. PacifiCorp (electric utility)
  3. MidAmerican Energy Company (electric and gas utility)
  4. NV Energy (electric and gas utility)
  5. Northern Powergrid (electric distribution)
  6. AltaLink (electric transmission)

Manufacturing (15)

  1. Precision Castparts Corp. (aerospace and industrial manufacturing)
  2. Lubrizol (specialty chemicals)
  3. IMC International Metalworking Companies (metalworking)
  4. Forest River (recreational vehicles)
  5. Clayton Homes (manufactured housing)
  6. Shaw Industries Group (flooring manufacturing)
  7. MiTek Industries (building products)
  8. Acme Brick Company (brick manufacturing)
  9. Benjamin Moore & Co. (paint manufacturing)
  10. Johns Manville (building products)
  11. CTB (agricultural equipment)
  12. ISCAR Metalworking Companies (metalworking)
  13. Tungaloy (cutting tools)
  14. Ingersoll Cutting Tools (cutting tools)
  15. WIDIA (cutting tools)

Services (10)

  1. FlightSafety International (aviation training)
  2. NetJets (fractional jet ownership)
  3. Berkshire Hathaway Travel Protection (travel insurance)
  4. Berkshire Hathaway HomeServices (real estate)
  5. H.H. Brown Shoe Company (shoe manufacturing and retail)
  6. Borsheims Fine Jewelry (jewelry retail)
  7. Nebraska Furniture Mart (furniture retail)
  8. Star Furniture (furniture retail)
  9. Jordan’s Furniture (furniture retail)
  10. Oriental Trading Company (party supplies)

Retail (7)

  1. Dairy Queen (quick service restaurants)
  2. Orange Julius (quick service restaurants)
  3. See’s Candies (confections)
  4. RC Willey Home Furnishings (furniture retail)
  5. The Pampered Chef (kitchen utensils and cookware)
  6. Fruit of the Loom (apparel)
  7. Russell Brands (athletic apparel)

Construction (3)

  1. MiTek Industries (building products)
  2. Shaw Industries Group (flooring manufacturing)
  3. Berkshire Hathaway Inc. – Building Products (building products)

Media (2)

  1. The Buffalo News (newspaper publishing)
  2. BH Media Group (newspaper publishing)

Sports (1)

  1. Brooks Sports (running shoes)

Capital allocation

Warren Buffett has consistently emphasized that Berkshire Hathaway’s primary strength lies in its savvy and prudent capital allocation, both among its subsidiaries and its investment portfolio. This approach is akin to that of diversified fund management — ultimately, the allocation of capital to various stocks in a fund’s holdings is the key factor that determines its returns and risk.

However, in Berkshire Hathaway’s case, its subsidiaries operate as independent businesses, providing much more flexibility in financing and business operations — a level of autonomy that a mutual fund or ETF cannot offer. While this flexibility is advantageous, one could argue it is a double-edged sword, as these businesses could make poor decisions. To mitigate this risk, Buffett has consistently sought to ensure that these companies remain under the management of their original owners and typically possess strong moats within their industries that Buffett feels comfortable with. 

Price or return behavior

Let’s compare BRK-A with the S&P 500 (VFINX) in terms of returns, rolling returns, and correlation.

Return comparison (as of 10/4/2024):

Name Maximum Drawdown 1Yr AR 3Yr AR 5Yr AR 10Yr Ar 15Yr Ar 20Yr Ar Since 1/15/90
BRK-A (Berkshire Hathaway Inc) 51.47% 33.00% 18.92% 17.29% 12.77% 13.78% 11.04% 14.03%
VFINX (VANGUARD 500 INDEX FUND INVESTOR SHARES) 55.25% 36.69% 11.74% 16.06% 13.29% 14.12% 10.48% 11.31%

Comments:

  • Since 1990, when data for BRK-A first became available, it has delivered an average annual return that is over 2.7% higher than that of the S&P 500 (VFINX).
  • However, it has underperformed the S&P 500 over the past 15 years or so. Despite this, it has still outperformed over the past 3, 5, and 20-year periods.
  • Its maximum drawdown since inception has been slightly lower than that of VFINX. This is remarkable, considering that BRK-A is a single stock, making it more susceptible to market speculation.

Taking a closer look at rolling returns:

We observe that BRK-A consistently outperformed VFINX in its early years. In the following chart comparing the rolling 10-year returns of BRK-A and VFINX, BRK-A’s rolling 10-year returns began to slightly underperform VFINX’s in 2018, specifically since the onset of the bear market induced by the financial crisis in 2008.

Conversely, BRK-A led VFINX in every 10-year period prior to 2011.

Given the current strength of the stock market since 2009, which has included some sharp but short-term corrections, we believe that the tide is likely to eventually turn in Berkshire’s favor.

Correlation with S&P 500

Using MyPlanIQ’s Asset Class Trends & Correlations tool (found under the Advanced tab), we can generate the correlations between BRK-A, VFINX (S&P 500), and value factor fund (VTV):

 

BRK-A is not strongly correlated with VFINX, particularly in recent times, which makes it an excellent diversifier within a portfolio.

Fund manager risk

One of the primary concerns regarding investment in Berkshire Hathaway is Warren Buffett’s advanced age. However, when comparing this concern to the risks associated with fund managers or management teams, we find that the risk is, at most, comparable to fund management risk. A mutual fund or ETF also relies on its managers and the parent management company. Since Berkshire has identified several excellent candidates to succeed Buffett, we believe this risk is manageable, as the nature of Berkshire’s business focuses more on investment and capital allocation at the top.

Tactical timing on Berkshire Hathaway stock BRK-A

If we treat BRK-A as a fund rather than a single stock, we can apply several MyPlanIQ strategies to it. The simplest approach is to use our composite momentum market indicator as a long-term timing signal to determine whether to invest in BRK-A or simply hold cash. The following displays the portfolios:

Name Max Drawdown 1Yr AR 3Yr AR 5Yr AR 10Yr Ar 15Yr Ar 20Yr Ar Since 1/15/90
P Composite Momentum Market BRK-A 48.95% 33.00% 18.92% 17.55% 13.24% 13.20% 13.07% 15.62%
P Composite Momentum Market VFINX Since 1990 33.81% 36.69% 11.75% 15.00% 12.41% 14.07% 12.83% 12.17%
BRK-A (Berkshire Hathaway Inc) 51.47% 33.00% 18.92% 17.29% 12.77% 13.78% 11.04% 14.03%
VFINX (VANGUARD 500 INDEX FUND INVESTOR SHARES) 55.25% 36.69% 11.74% 16.06% 13.29% 14.12% 10.48% 11.31%

The rolling 15-year returns: 

It is clear that the composite indicator strategy can contribute an additional 2.5% in annual returns while reducing interim losses (i.e., maximum drawdown) even on BRK-A. 

Summary

We believe that Berkshire Hathaway, in itself, is a well-diversified fund with unique characteristics. However, we want to caution that Berkshire is one of only a few conglomerates with such “investment fund” features. In other words, it is difficult to find other conglomerates that exhibit similar traits, so one should not generalize this to other stocks or companies.

We plan to include BRK-A in some of our advanced portfolios in the coming months, as we believe that adding such a conglomerate stock to an asset allocation portfolio can enhance returns while reducing risk.

Market Overview

One of the significant developments since our last newsletter is that the employment report for September was much better than expected: the U.S. added 254,000 jobs compared to the anticipated 142,500. Additionally, unlike in previous periods, the job numbers for July and August were also revised upward. The unemployment rate fell from 4.2% to 4.1%.

While this good news is promising, it could potentially lead to inflation returning. However, it is still too early to determine this with certainty. Markets have since revised their expectations for the scale of the Federal Reserve’s rate cuts.

Another notable development is that China has indicated it will implement large-scale monetary and fiscal stimulus policies to help pull the world’s second-largest economy out of deflation. This could introduce another factor into the U.S. inflation fight.

As always, we claim no crystal ball and we call for staying the course which is guided by well-defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as we have emphasized numerous times when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years, preferably much longer, given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. If you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Also, you should follow your strategy rigorously, especially during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market is through dollar cost average (DCA), i.e., invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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