Within the sphere of the stock market, one cannot neglect the omnipresence of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), a powerhouse overseen by none other than Warren Buffett, widely seen as the preeminent investor of our time. The magnitude of this conglomerate has seen it significantly outperform the market over several decades, boasting an impressive track record.
From 1965 to 2024, it’s important to highlight that Berkshire’s stock saw compound annual returns of 19.9%, a significant overachievement when compared to the broader S&P 500’s gains of 10.4%, inclusive of dividends. Additionally, it’s worth noting that unlike S&P 500, Berkshire does not pay dividends. This performance, however, beckons the question, does the stock of Berkshire Hathaway have the potential to facilitate the creation of millionaires?
Berkshire Hathaway has gradually evolved into a financial powerhouse, an achievement Buffett attributes partly to a strategy typically contrary to popular investment advice: lack of diversification. ‘Diversification is protection against ignorance,’ says Buffett, expressing confidence in his investment choices. However, paradoxically, Berkshire Hathaway’s stock itself provides investors with substantial diversification.
Berkshire’s diversified portfolio includes robust businesses spanning a range of industries, offering an ironclad insurance entity, namely GEICO, one of the leading insurance providers in the US. The diversity extends to ownership of significant cash-generating assets, such as the Burlington Northern Santa Fe Railroad, a repertoire of energy assets and an array of manufacturing, service and retail entities.
In addition to these, Berkshire’s substantial $258 billion equity portfolio has consistently driven significant earnings, albeit with occasional fluctuations based on market trends. However, Buffett advocates that investors should focus primarily on the company’s operating earnings, treating the investment gains as subsidiary.
Providing further substance to the diversified nature of the Berkshire portfolio are the 38 stocks it includes. These represent a broad cross-section of the economy – from large financial institutions, oil and gas companies to big tech firms dabbling in artificial intelligence, telecom firms, convenience food restaurants, supermarkets and beyond.
Furthermore, the sheer scale of Berkshire’s operations has empowered it to espouse a conservative approach as and when deemed necessary. In recent times, the company’s conservative norms have led to the accumulation of an astonishing cash reserve, amounting to over $345 billion by the end of 2024. This reserve includes cash, cash equivalents, short-term U.S. Treasury bills, and investments in fixed maturity securities.
Perhaps the above-mentioned eye-popping cash reserve, when coupled with the managerial prowess and proven performance, is what steers investors towards Berkshire as a safe haven during turbulent market periods. Notably, the company’s stock has significantly exceeded broader market performance amidst the prevailing market uncertainties.
Investors’ respect for Buffett and his team has been further deepened by their unwavering adherence to the long-standing principles of investment that have persistently yielded results. At a time when investors were aggressively capitalizing on soaring market trends and pushing valuations to peaking levels, Berkshire Hathaway maintained its discipline, limiting its own purchase of shares while selling off some stocks.
The real question, however, still remains, can Berkshire Hathaway be labeled a ‘millionaire maker’? From a historical lens, the investment in Berkshire’s stocks has led to the accumulation of millions for countless investors. There is significant potential in the stewardship of existing and forthcoming leaders to continue optimizing capital.
On the premise of its market cap exceeding $1 trillion, one must not expect the stock to instantaneously multiply or even double its value significantly. However, if one were to extend Berkshire’s historical compound annual growth rate (CAGR) of 19.9% to an initial investment of $100,000, it would burgeon to $1 million in around 12 to 13 years.
That being said, this estimate is based on a nearly six-decade performance, which implies no assurance of the same growth rate in the ensuing shorter duration. The stock’s performance could either surpass or lag behind the historical benchmark. Yet, the potential of Berkshire’s stock paving the way towards a millionaire status cannot be completely disregarded.
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