Buffett’s Berkshire Hathaway Inc. Has Been Masterfully Managed And Will Continue To Benefit Investors

Last year, on Aug 25, I recommended readers start buying shares of Berkshire Hathaway Inc. (BRK-A) (BRK-B) in incremental amounts until the end of 2008.

I emphasized that Berkshire should be a core, long-term holding in investors’ portfolios and not a stock to trade in and out off.   Today, the stock is about 11% above the price that it finished 2008 at.

This recommendation was issued a mere three weeks before Lehman Brothers’ Sept. 15 bankruptcy filing.  I knew at the time that there was a strong probability that Lehman would go bankrupt and that the market would tank, but I felt that the huge amount of cash on Berkshire’s books would provide it with countless opportunities to pick up quality assets at bargain prices.

“Under Buffett, Berkshire Hathaway is a like an astute and disciplined kid in a candy store,” I wrote.

Buffet, a savvy and well-financed investor, made the most of this opportunity to cherry pick new acquisitions at ridiculously low valuations and profit handily. Notably, he took big stakes in Goldman Sachs Group Inc. (GS) and battery and carmaker BYD Co. Ltd. - both of which he profited handsomely on.

In fact, Berkshire’s concentrated stock holdings, including Wells Fargo & Co. (WFC), American Express Co. (AXP) and others, have strongly outperformed the Standard & Poor’s 500 Index this year, giving BRK very sizable book value gains.

And on the operating side, Berkshire’s insurance business has shown gains in insurance premia and in operating cash flow.  All of this added to the already pristine financial strength of the company.

Great crises bring great opportunities and great institutions take advantage of those opportunities.  Berkshire Hathaway, true to its discipline, has done just that. It recognized the immense opportunity and deployed its huge war chest in the greatest acquisition Warren Buffet has ever made - the roughly 76% of Burlington Northern Santa Fe Corp. (BNI) that it did not already own.

Warren Buffet is investing in a business that he knows extremely well and that has tremendous long-term potential.  Railroads will almost certainly keep gaining in value as energy prices make them more cost-effective. Burlington Northern benefits from high energy prices because rail is many times more energy-efficient than other modes of transportation, and because it is integral in the transportation of coal, which meets about 50% of the US economy’s fuel needs.

BNI’s large, unique assets make it an absolute bargain at today’s prices.  And with the dim prospects for the U.S. dollar, and with the U.S. economy in recovery mode, money put into any business that is leveraged to energy is likely to pay off.

The acquisition reduces Berkshire’s huge cash position and the risk of value destruction that would come from inflation. It also increases the beta of Berkshire stock, that is, its sensitivity to equity market swings, due to the strong exposure to a very cyclical business.  At the same time, this move reveals to us the confidence that Warren Buffet has in U.S. economy.

The likelihood that rating agencies will downgrade Berkshire’s credit rating is a modest price to pay for the appropriate strategy at managing one’s balance sheet, eliminating exposure to inflation, and taking advantage of higher prices and greater rail cargo volume moving forward.

Having Berkshire Hathaway stock is a good choice in current conditions.  It’s the perfect time for the company to take advantage of its financial strength and vast war chest.  It has not disappointed, as many of Warren Buffett’s earlier critics have been proven wrong.  It now becomes an even more attractive, astutely diversified play on the rebound of the US economy.

To cap it all, Berkshire has decided to split its Class B stock 50 to 1, making it more accessible to smaller investors.  This is a welcome and long overdue move that will certainly expand the stock’s global appeal.

Recommendation: Buy shares of Berkshire Hathaway Inc. (BRK-A) (BRK-B) if you haven’t already (**). And if you currently have shares, we encourage you to hold onto or add to them.

(**) Horacio Marquez owns no interest in Berkshire Hathaway Inc.

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