The legendary head of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)Warren Buffett is virtually unparalleled in his investing acumen. You don’t get a nickname like “Oracle of Omaha” by being sloppy. Although it may seem so at times, his success does not come from predicting the future; it comes from adhering to a clear, disciplined strategy and philosophy who guide his every move.
Buffett has always had his eyes on the horizon. He believes in finding companies with fundamental competitive advantages – ‘moats’ – and supporting them for the long term. As he put it in a letter to shareholders in 2023: “If you find a truly great company, stick with it. Patience pays off.”
Berkshire Hathaway is certainly a wonderful company, and patience has certainly paid off. Just a $1,000 investment in Berkshire in 1980 would be worth $2.3 million today. However, is that true? What will the next five years bring for the company? Let’s see.
Berkshire’s own businesses are doing well, especially insurance
Berkshire is a conglomerate that owns a portfolio of subsidiaries as well as a portfolio of investments in outside companies, such as its stake in Apple. Although the latter often receives more media attention, the companies that Berkshire controls make up a large part of the company’s bottom line.
Berkshire’s subsidiaries span a wide range of industries from energy to manufacturing. Most of these companies look strong and critical; they make quite a bit of money, allowing Buffett to be successful on the investment side of the business.
Insurance has long been the backbone of Berkshire, and recently Berkshire’s insurance segment has been growing rapidly. Net underwriting profits in the first quarter of 2024 nearly tripled year-over-year and nearly doubled year-over-year in the second quarter of 2024. Geico, probably the best known of these, is a key part of this growth.
Geico has been overtaken lately by Progressivewhich has grown even faster. Berkshire’s Vice Chairman of Insurance Operations, Ajit Jain, pointed out that Geico was falling behind in its use of technology as the main culprit. Progressive has made better use of new technology to manage risk.
The good news is that leaders are aware of this and are pushing to catch up. Despite this handicap, Geico has achieved tremendous growth; if it can improve the use of new technology, the company will be that much stronger. Since Geico has one of the lowest costs of any major insurer, I think this is a recipe for success in the years to come.
It’s been a big year for Berkshire’s investments
This year saw some big changes to Berkshire’s core portfolio. The largest was the sale of almost half of his stake in Apple, followed closely by the sale of a significant portion of it Bank of America position. There have also been some purchases, but these are completely overshadowed by the fact that Berkshire has divested large parts of its core interests. The company currently has a pile of cash (and much of it is held in relatively liquid assets like short-term U.S. Treasury bonds). Just look at the wild revival in this reserve over the past year.
What does Buffett have in store? While it’s impossible to know for sure, I think there’s a good chance that Buffett is concerned that the market is a little too hot right now, but he won’t sit on that much money for too long. I think it’s safe to say that he and his company have something in mind and are preparing for a major investment. I think he believes he can find other companies that will outperform Apple and Bank of America in the coming years.
Buffett’s age is the elephant in the room
Warren Buffett is 94 years old. I think it’s safe to say he won’t be at the wheel for too much longer. It is possible that his departure will fall within the five-year time frame being considered. This will inevitably impact the company as he is unique. However, what he does is not magic. His vision and philosophy are so deeply ingrained in the company that his departure will be smoother than some investors fear.
Especially in recent years, he has never been the only guiding hand. He built the company with the late Charlie Munger, and together they formed a team of managers for many years, many of whom had had independent control of parts of the Berkshire portfolio for some time.
I believe the continued strength of Berkshire’s subsidiaries, with the likely large investments to come from the current pile of cash, means the next five years will continue to be successful for the company. Even if Buffett leaves Berkshire in the near future, the company’s stock will outperform the market.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Bank of America, Berkshire Hathaway and Progressive. The Motley Fool has a disclosure policy.
Where Will Berkshire Hathaway Stock Be in Five Years? was originally published by The Motley Fool
