Berkshire Hathaway is an iconic investment choice on Wall Street, but it isn’t going to be a good option for every investor. Here’s why.
Warren Buffett, the CEO of Berkshire Hathaway (BRK.A 0.61%) (BRK.B 0.54%), is known as the Oracle of Omaha. That’s a testament to his investment acumen, which has led Berkshire Hathaway stock to trounce the returns of the S&P 500 index over the long term. But you shouldn’t chase returns here. Berkshire Hathaway is not a stock you should own unless you really understand the company. Here’s why you might not want to buy this Wall Street icon.
1. Berkshire Hathaway is going nowhere fast today
Although Berkshire Hathaway has resoundingly beaten the S&P 500 over the long term, that is all historical performance. And as every investor is warned, past performance is not a guarantee of future returns.
BRK.A Total Return Level data by YCharts
This is particularly notable today because a very important person has weighed in on Berkshire Hathaway’s future — Warren Buffett himself. In the company’s 2023 annual report, he stated, “All in all, we have no possibility of eye-popping performance.” There are multiple reasons for that outlook, including the lofty valuations throughout the broader market today and the size of Berkshire Hathaway’s business.
The big takeaway here, though, is that Buffett is telling investors to temper their expectations for Berkshire Hathaway. If you’re hoping to get in on a company that’s going to massively outperform the market the way it has in the past, that’s probably not going to happen.
2. Berkshire Hathaway is huge and complex
Some investors like to really dig in and get to know the companies they own. If that sounds like you, you’ll probably hate Berkshire Hathaway. It is massive, with a $900 billion market cap, and it’s difficult to follow. The company is basically a giant conglomerate, with very large businesses in insurance, utilities, pipelines, and railroads. Those four operations get broken out separately on the balance sheet. Then there are smaller businesses it owns that span retail to services to manufacturing, and a whole lot in between. The company’s annual report contains dozens of pages devoted to explaining the business. Most companies need only a paragraph or two.
And then there’s the stock portfolio. These are investments where Berkshire Hathaway owns huge stakes in publicly traded companies but it doesn’t own controlling stakes. The list is highly concentrated in a small number of stocks, but the list can and does change — often fairly quickly. Buffett, for instance, recently sold around half of Berkshire Hathaway’s stake in technology giant Apple.
In all, it’s hard, if not impossible, to really keep tabs on what’s going on beneath the surface at Berkshire Hathaway in any material detail. You have to trust in Buffett’s management approach. If you prefer to be in control, Berkshire Hathaway will be hard for you to own.
3. Berkshire Hathaway is gearing up for a big change
Berkshire Hathaway has long been the investment vehicle of CEO Warren Buffett. Helping him along the way to his impressive success was his business partner, Charlie Munger, who died in 2023 at age 99. He wasn’t that much older than Buffett. It’s therefore highly likely that Berkshire Hathaway will be under the leadership of a new CEO sooner rather than later.
Buffett isn’t ignoring the succession issue, having named Greg Abel as his heir apparent. Abel has been with Berkshire Hathaway a long time and is steeped in the culture, which is good news. But there’s no way to know how he will lead the company until he’s actually leading it. Handpicked successors sometimes fail to deliver, as both General Electric and Disney have shown can lead to bad outcomes for investors. And as noted, Berkshire Hathaway isn’t the same company it was when Buffett built his incredible track record. The company Abel will take over is much larger and far more complex today.
If you’re looking to invest alongside Buffett, Berkshire Hathaway is the way to do it. But Buffett may not be the CEO for very much longer. And if big management transitions worry you, well, buying Berkshire Hathaway today might not be for you.
Berkshire Hathaway is a great company, but…
There’s nothing wrong with buying or owning Berkshire Hathaway. It’s a large and well-run company with a long history of success behind it. But it’s not going to be a great fit for every investor. You’ll probably be disappointed if you expect the giant company to perform the way it did when it was a much smaller company. If you like to have a deep understanding of what you own, that will be hard to do here. And if you’re buying specifically because of Warren Buffett, well, he’ll be handing over the reins to a new CEO sooner rather than later.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Walt Disney. The Motley Fool has a disclosure policy.
