According to Warren Buffett’s favorite financial metric, Berkshire’s net worth is $663 billion, leaving Nvidia ($66 billion) and Apple ($57 billion) in the dust
Look at the list of the ten most valuable companies traded on US stock exchanges and something immediately jumps out. Nine of the companies comprise the coolest and most exclusive club in the world, glamorous tech companies led by Apple (No. 1) and Nvidia (No. 2), along with Microsoft, Alphabet and more. And then there’s Berkshire Hathaway. Like they used to sing Sesame Streetone of these things is not like the other. It’s like seeing a typewriter company on a list of hot IPOs. Who let Berkshire get past the velvet rope? It owns a company called Acme Brick, for goodness sake. The website does not appear to have changed significantly since about 1998. The CEO is 94 years old. But its market cap rose above $1 trillion a few months ago without anyone noticing, and now it sits just below Tesla and above Taiwan Semiconductor.
So what gives? The deeper we dig into the bizarre Berkshire anomaly, the more remarkable it seems and the more valuable the explanations become. The company is literally in a class of its own. It’s not a tech company, but its market cap exceeds that of all other non-tech companies by such a huge margin that it doesn’t appear to be one of them either; the number two in that group, Walmart, would need to gain 41% more value to match Berkshire’s market cap.
Another way to consider the magnitude of Berkshire’s performance: So far in this tech-enamored year, Berkshire shares have outperformed shares of Apple, Microsoft and Alphabet. It has beaten the tech-heavy Nasdaq as well as the S&P, the Dow and the Russell 2000. It’s hard to remember that CEO Warren Buffett told his shareholders last February: “All in all, we have No possibility of dazzling performance.”
But performance can be measured in many ways, and market cap isn’t Buffett’s favorite way to judge a company. Market cap measures the market’s expectations, not measurable financial results, and as Buffett often notes, Mr. Market has mood swings. Instead, Buffett focuses on net worth as calculated under generally accepted accounting principles (GAAP). The concept is simple: add a company’s assets and then subtract its liabilities. What remains is the net worth. Apple’s net worth is $57 billion. Nvidia’s costs $66 billion. Berkshire’s is $663 billion. Some of the other tech giants have higher net worth than Apple and Nvidia, but none reach even half of Berkshire’s. As Buffett also told investors in February: “Berkshire now has…by far—the largest GAAP assets recorded by each American business.”
Berkshire students might counter that the company is more of a technology company than it seems, because it owns a lot of Apple stock. But the argument doesn’t hold water. Berkshire owns several insurance companies (GEICO is the best known) and invests customers’ premiums in huge stock portfolios – and Apple is the largest holding company. But Berkshire has been shedding its Apple shares for almost a year, with about 70% of its holdings gone so far. That is, Berkshire stock has risen as the company exits tech, dumps its Apple stock and posts huge profits.
Which brings us to the decades-old secret of Berkshire’s breathtaking performance, highlighted by the stock market events of the past year. It’s no secret, of course. It’s Buffett, a fiercely independent, scorchingly intelligent CEO. He often seems completely out of step with the world, such as when he sells Apple stock in a rising market. Other business bromides he disdains:
· Everyone knows that diversified conglomerates are a terrible idea. Decades of copious research have shown that they underperform. But in 2015, Buffett told his shareholders, “Berkshire is now a sprawling conglomerate that is constantly trying to expand…. When used judiciously, the conglomerate form is an ideal structure for maximizing long-term capital growth.” The phrase “judiciously used” is his humble way of saying “as well used as I use it.”
· CEOs don’t disrespect their company’s stock. But over the years, Buffett has told shareholders when he thinks Berkshire’s stock is overpriced, and he warns them of potential trouble ahead, as he did again this year. Berkshire is always looking for companies to buy, but the company has grown so big, he says, that “there are only a handful of companies left in this country that are capable of really taking the lead in Berkshire,” and for various reasons he is not interested. when buying it. Outside of the US, “there are essentially no candidates who are meaningful options….” That’s why he said there won’t be any “dazzling performances.” Yet shareholders did not run for the exit. Quite the opposite. They trust he will find a way.
· Companies promote the products they sell by using them. Berkshire often does that, but not always. It sells directors and officers insurance, which indemnifies board members from personal liability for their actions. But not in Berkshire. “We don’t offer [board members] Liability insurance for directors and officers, a given at almost every other major publicly traded company,” Buffett said in his 2011 letter. “If they mess with your money, they will lose their money too.”
It seems amazing that Buffett has somehow invaded the tech royals’ jamboree, but it shouldn’t be. He’s been so fearlessly unconventional for so many years that little should surprise us. If things had been different, Berkshire stock wouldn’t have risen 4,384,748% under his 60 years of management.
Buffett continues to amaze. This is just his latest brain teaser: A 94-year-old CEO joins the tech bros and, in some ways, surpasses them.
