Berkshire's operating companies will reflect the state of the economy. When you own the second-largest residential real estate company you will mirror residential real estate. The same goes for Nebraska Furniture Mart. See's Candies and Dairy Queen will see a bigger fall-off than, say, General Mills or a pasta maker. Borsheims Jewelry? See TIF. The key is "cash flow" from the OpCo's and the float from the insurance ops. That Warren has.
From USA Today:
...Cash from the insurance premiums is also used to create a portfolio of sizeable stakes in several publicly traded companies. For instance, at the end of 2008, Berkshire Hathaway owned 18.4% of The Washington Post, 13% of American Express and 8.9% of Kraft Foods.
You may already know all that. But what you might not know is while Berkshire Hathaway shares are up this year, they're lagging the rest of the stock market by a wide margin. So far this year, Berkshire Hathaway's B-class stock, selling for around $3,300 a share, is up around 3%, as you can see here. Meanwhile, the Standard & Poor's 500 is up about 16%, as you can see here. Keep in mind, too, that the S&P 500 pays a roughly 2% dividend yield, while Berkshire Hathaway pays no dividend.
So, the first point I'd make is that owning Berkshire Hathaway doesn't guarantee you'll get a piece of the company's world-famous returns. Again, Berkshire Hathaway is lagging the stock market this year and the gap will take quite a rally in Berkshire to close. Clearly, Buffett has a solid long-term record, and may come racing back, but assuming that he can always beat the market isn't a safe assumption.
Should you buy Berkshire Hathaway class B stock now? To find out, I'll put the stock through the four steps considered here at Ask Matt:
Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Berkshire Hathaway Class B's trading history back to 1996, we see the company generated an average annual compound rate of return of 11.2%. That is an outstanding return if you consider the Standard & Poor's 500's comparable return was 5.5%, says IFA.com.
To get that return, which beat the S&P 500 by 104%, you accepted moderate risk — standard deviation — of 24 percentage points. That's 48% greater than the S&P 500's long-term risk. But Berkshire has been able to generate returns high enough to compensate you for the higher risk.
Berkshire is one of the few stocks to pass this tough test. In fact, Berkshire's return since 1996 even tops the 8.3% average annual return of emerging markets stocks, measured by the IFA Emerging Markets Index, despite having nearly identical risk.
Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price to the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs. When we run Berkshire's stock, we find it's rated "neutral." In other words, the current stock price is roughly equal to what the company is expected to generate in cash over it's lifetime. Using this analysis, it would appear Berkshire's stock is fairly priced: not cheap, but not expensive, either....MORE