Risking to be accused of blasphemy with this Weekly by one or the other Buffett-fan, nonetheless I decided to have a look at the stock of Berkshire Hathaway. Warren Buffett’s investment holding has achieved a tremendous performance and beaten the markets by a wide margin since its inception. However, this was not the case in the younger past. Growth constraints are one reason. But there are quite a few other aspects that do not make this conglomerate appear to be the ultimate must-own stock.

Summary and key takeaways from today’s Weekly
– The investment success of Berkshire Hathaway is undisputed. Unfortunately, it seems the majority of investors values the stock predominately based on past performance.
– Berkshire’s stock looks pretty expensive. There are two reliable indicators for that.
– Further, Buffett raising cash should not be over-interpreted that he will strike a major deal. Not only have his last big deals been questionable, but he also didn’t make use of great buying opportunities.

I guess it is rather safe to say that almost everything relevant is known about Warren Buffett and his investment holding Berkshire Hathaway (ISIN: US0846701086, Ticker: BRK.A).

What I am certainly not going to do is to praise and worship Buffett’s achievement to the extreme. He has done what he has done. That is known, but that is also the past.

There are enough such articles around.

My intention with this Weekly is to have a look at the stock of Berkshire from today’s perspective, trying to assess the future potential. I know that many retail investors, but also fund managers see the stock of Berkshire as a core holding. Some as the superior alternative to just holding cash, others as an undervalued “high-quality” stock pick.

As there are barely any negative voices or opinions, mine is a highly contrarian call.

Not because it was my goal from the outset, but because looking objectively especially at the last 10–15 years, there’s simply not much to celebrate – despite the stock having made new all-time highs during 2024. And this is what makes me skeptical for the future.

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^{both as per 08 January 2025 market close – since August 2022}

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Be fearful when others are greedy

Sounds familiar?

One of Warren Buffett’s most famous quotes is the one describing his anti-cyclical approach of buying when others are selling in fear and vice versa.

“Be fearful when others are greedy and be greedy when others are fearful.”

Or the other way around. I think you get it. In theory, it makes absolutely sense to buy cheap and sell when stocks are expensive. In practice, either, but: Easier said than done, as emotions and psychology often make especially less experienced investors stumble over these hurdles.

Regarding today’s topic, I guess we might be close to the top in Berkshire Hathaway.

A bold call and very contrarian. I know.

Depending on currency depreciation, new nominal highs might of course happen. But for the time being, I am expecting this to have been it.

Having said that, the stock is clearly not a buy for me.

Trying to apply the “no clear yes is a clear no” approach to my everyday life in order to make quicker decisions by giving my gut feeling the chance to be heard, one might interpret this as a sell signal. I am not giving concrete recommendations. Everyone can make up their own mind.

It sounds very nuts. I am aware of that. But despite having had a strong year 2024 with a performance of 24% and being more or less on par with the S&P 500, under the hood it does not look that good like on the surface.

For a complete performance review, over the last five and ten years, Berkshire’s stock has beaten the S&P 500 index which is quite an achievement, given Berkshire’s size constraints (see my older and to this day most popular article here).

However, Berkshire’s stock trails the total return version which includes dividends – which as we know Berkshire doesn’t pay. So it makes sense to have a look at the total return index, because Berkshire is retaining (keeping) these not-paid-out earnings on its balance sheet (dividends get subtracted from stock prices).

Over the last five years, both are almost on par. Over the last decade the index has the upper hand by 24 percentage points as of writing.

Interestingly, dividends seem to be the main difference, but that just on the side.

Now, what makes me feel uncomfortable? In essence, two things.

The acquisition and investment performance of the last roughly two decades on one side and the current valuation of Berkshire’s stock as well as share buyback activity on the other.

Let’s start with acquisitions and investments.

I am separating these two because the former is full takeovers while the latter are public investments, predominantly in stocks with part-ownership.

Regarding full acquisitions, Berkshire Hathaway has not made any superior bold acquisition over the last two decades. Superior and / or bold in the sense that it has shaped and influenced Berkshire’s performance strongly. Or in other words, no famous “moving the needle” deal.

They bought the railway Burlington Northern Santa Fe (BNSF) during the Financial Crisis of 2009 for 26 bn. USD – the biggest deal so far back then (see here). Right. But this is only a small piece in the entire portfolio. And hardly a game changer. Its recent operating performance was trending down with margin pressure as well as lower earnings, despite operating in a rather safe oligopoly / monopoly sector of railways.

At least this is what Buffett himself had written in his latest shareholder letter.

Margins haven’t slipped just now in the short-term as it seems. Buffett writes that they are now lower than at the time of the acquisition relative to their competitors.

Now, let’s take a look at how much operating earnings have grown until today in absolute terms for BNSF.

Compared to 2010, 4.5 bn. USD vs. est. 6.5 bn. USD for 2024 (based on the numbers from the screenshot below) the growth rate is not even 50% – over 14 years.

That’s a yearly growth rate of 2.7% – rounded up.

For a better perspective, BNSF is often mentioned by its name and as having been a big deal. Today, it contributes less than 15% to operating earnings of all the fully owned businesses.

That’s not nothing, but it is just a part of the whole.

Below, we can see that operating earnings started to turn around a bit. That’s good news, but the growth rate is small. On a nine-month basis even below the inflation rate.

All in all, not convincing, despite the hype and celebrations and despite being listed as a full individual position not hidden under a broader segment.

While bolt-on acquisitions can be a great strategy to pursue because deals are easier to do and risks are spread over several bets, the problem is Berkshire’s big and growing cash holdings are being celebrated as if a major acquisition were around the corner.

Berkshire currently holds per last count 325 bn. USD in cash and short-term investments. This is mainly the result of Buffett having sold big stakes in Apple (ISIN: US0378331005, Ticker: AAPL) and Bank of America (ISIN: US0605051046, Ticker: BAC) during 2024 (see here).

Apple’s case is key, because temporarily, it made up half of Berkshire’s entire equity investment portfolio. Tell that everybody who claims investing like Buffett means diversifying over many, many stocks.

This move to raise plenty of cash in a rather short timeframe is interpreted as Buffett being cautious, even expecting a coming massive correction. Or in other words, he is said to be waiting for the opportunity to shoot his famous big elephant.

The other part of the truth is that Berkshire, respectively Buffett does not intend to invest the entire cash pile. As you can see above liquidity on hand never fell below 100 bn. USD over the last five years – not even during buying opportunities in 2020 or 2022.

If you look closer, you’ll notice Berkshire always having a cash to total assets ratio of 10–15%. However, this chart goes only until the end of 2023. Per last count, i.e. Q3 2024, this ratio has risen to an unseen 28%. This is definitely an elevated level, but don’t forget that Buffett is always holding a decent amount of cash. That’s the thing to keep in mind. He’s unlikely to go all-in.

But let’s assume this were the case and the majority of cash were put to work.

This is a huge chunk as it represents more than a third of Berkshire’s current entire market cap. Plus, this sum, even after subtracting a cash reserve for the insurance business (which Buffett always wants to keep), is more than most publicly traded companies put on the scales.

For example and just theoretically, Buffett could buy entire energy-giant Chevron (ISIN: US1667641005, Ticker: CVX) and still have 60 bn. USD left over as buffer for the insurance operations (in theory, he already owns a stake and this is measured against the current market cap without a required takeover premium).

Just as a ballpark figure.

One aspect I haven’t heard of or read anywhere else, potentially explaining why no really big deal has been done and potentially never will be:

For Buffett the culture and leadership is important. With scale this becomes tougher to achieve. What I mean, I cannot imagine him to buy a 100 bn. or 200 bn. USD company and be able to pursue his approach of culture and leadership and influence them in an over-fattened, less agile and more bureaucratic organization of a major concern.

This is barely possible if at all with such huge companies.

Speaking of big deals, the biggest deal so far was the buyout of airplane and defense supplier Precision Castparts for 37 bn. USD in 2015 (see here).

It is said Precision generates about 1.5 bn. USD in pre-tax income (see here) – almost a decade after the deal. Besides, I cannot remember this acquisition having been mentioned extensively, as there does not seem to be much to celebrate. While BNSF is prominently listed separately with its own name, Precision Castparts – again, Berkshire’s biggest full acquisition ever – is not.

In the end, the valuation multiple is still about 25x with today’s pre-tax earnings. Hardly convincing.

Coming to the investment portfolio, it is no secret that Buffett hit the jackpot with Apple when he started buying its stock in 2018. I don’t need to comment too much on that one. But which other big winners did he have, either before or thereafter? Kraft Heinz (ISIN: US5007541064, Ticker: KHC)?

The only thing I wanted to reiterate in this regard – as written in more detail in my first Buffett article (see here) – Buffett doesn’t like, respectively feel comfortable with tech stocks. But this group is the only one big and liquid enough to absorb a bigger chunk of money.

With that, it is unlikely that he will find one or two companies where he can park significant money without having to buy too big chunks and risking to influence stock prices. Likewise noteworthy, during 2020 and 2022 – two windows offering major buying opportunities – Buffett did exactly nothing. Allegedly, he was already then waiting for a crash or at least a big correction to then strike big.

Nothing happened.

This is the more surprising as selloffs usually offer a higher liquidity than bull markets. The reason is that people sell in panic and often do so all at once. For a professional and deep-pocketed buyer this is the perfect time to go shopping without risking to send stock prices dramatically higher.

He ignored his own advice to be greedy when others are fearful.

Coming to my second area of criticism: valuation and buybacks.

The first and somehow most obvious metric to value Berkshire Hathaway is the price to book ratio. Predominantly, because it valued itself using this figure, evidenced by the fact that they for decades have been showing the evolution of book value per share at the beginning of their annual reports next to their share price performance.

This was the case the last time with the annual report for 2018.

The PBV looks the following for Berkshire.

Without stretching too much and not even looking in detail at the concrete numbers, we can immediately see that Berkshire is trading on one of the highest levels since almost 20 years. Definitely in the upper part of the range.

Precisely, the figure is 1.5x for price to book. Buffett himself once considered publicly a level much below that as fair. I can remember him saying that he will be buying back stock aggressively below 1.2x.

Only measured by this, the downside would be 20%.

Banks and insurance companies usually are seen as cheap below 1x their book value (given a decent asset quality). Above 1x includes a premium. So why should Berkshire not be valued at a premium now, given the above?

But it gets better.

Above here on the second chart we see that tangible book value, i.e. without intangible assets. It shows a figure of almost 2x for Berkshire Hathaway.

This doesn’t look pretty cheap either. Given that there were quite a few opportunities with figures below 1.5x and 1.3x of price to tangible book value, 2x does not look like a steel – but to be fair, also not on the top of the range. But definitely not cheap. Neither in absolute, nor in relative terms.

I know one or the other could shout at me that even Buffett in one of his shareholder letters wrote that book value has lost its significance and post-2018 stopped showing it prominently in the performance overview.

But has it?

For certain companies, yes. But for others not!

The reasoning is that companies are today buying back more shares than they did in Buffett’s early investing days. If I am not mistaken, there was even a period where buybacks were entirely forbidden, but this does not alter the following.

Buybacks reduce equity on the balance sheet and thus make a stock more expensive on this metric. As a secondary effect, buybacks due to shrinking share count make a single share more valuable and thus ideally more expensive, i.e. less equity (book) and more price have a diverging effect by increasing the PBV.

For me this does not make much sense when compared with dividend payments. Or in other words: Both are distributions to shareholders, respectively money outflows. Both are reducing equity in the books. So either both are bad or none, but not only buybacks. What’s correct, though, is that buybacks influence share prices, while dividends “only” the equity portion.

But there’s no guarantee that stock prices rise – many have bought back their shares and still saw prices falling… Hence, with a grain of salt!

Regarding Berkshire itself, as long as buybacks are done aggressively, this is true, though. Equity in the books is reduced by the amount of shares bought back, making the stock more expensive. The more so, if the stock rises.

Let’s have a look at Berkshire’s buybacks.

We can clearly observe two things. First, Berkshire dialed back its buybacks every time stock markets had a tough time (read: they should have rather been upped exactly then at lower share prices) and that buybacks recently have become even less and less (while markets continued to climb up).

Per last count, i.e. during Q3 2024, there were even practically none at all. The chart above shows buybacks until Q2 2024. Until then, Berkshire spent ~2.9 bn. USD during 2024.

As another layer, insurance businesses often are measured and valued with their book value. This applies to many “old-economy” businesses like insurance, banks, railroads, energy, industrials, etc.

Guess what Berkshire mainly consists of? Bull’s eye!

It even gains in significance, if we have more cash and short-term investments before us, because they are not difficult to value. They are what they are, there’s no valuation premium or the likes.

In essence, claiming that the price to book ratio especially in the case of “old economy” Berkshire Hathaway has lost its meaning is… a completely lost message!

If Buffett stopped buying his own stock at these valuations – why should anyone else buy it? If it were undervalued and / or cheap, he would for sure aggressively repurchase it. Cash is not the issue.

We could dig deeper and force ourselves to find value where there is hardly any to find by comparing multiples on operating earnings. But let’s keep it simple. Also his still-biggest holding Apple looks rather grossly overvalued with a PE multiple of close to 40x while not growing and facing demand worries in China, implying that his stock investment portfolio trades at a premium.

The price to book ratio has worked well for Berkshire and similar companies.

You can also forget the argument that Berkshire is such a high-quality company, deserving a premium. Either way, we do not want to buy such stocks at a premium, deserved or not. We want them at a discount for a sufficient margin of safety, not with little room for errors.

Conclusion

The investment success of Berkshire Hathaway is undisputed. Unfortunately, it seems the majority of investors values the stock predominately based on past performance.

Berkshire’s stock looks pretty expensive. There are two reliable indicators for that.

Further, Buffett raising cash should not be over-interpreted that he will strike a major deal. Not only have his last big deals been questionable, but he also didn’t make use of great buying opportunities.

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