Is Berkshire Hathaway a Good Investment?

We have often used Warren Buffett and his company as an example of the use of intrinsic stock value as a guide to profitable investing. And, we mentioned his so-called silent warning for investors in that he was stockpiling cash because he did not find any stocks that fit his criteria in an overpriced market. Now we see that The Motley Fool is suggesting the dirt cheap Warren Buffett stock as a current investment opportunity.

The reason I like Berkshire now is the reason why so many investors have hated it recently. The insurance giant has a cash hoard that’s unparalleled, and the coronavirus crash has given Buffett the chance to deploy that money in any of a host of smart ways. Crisis situations like this are what make Buffett stand apart from the crowd. It’s been a long wait, and the amount of cash on Berkshire’s balance sheet weighed on performance during the bull market. Now, though, Berkshire shareholders are likely to get their comeuppance.Yet because Berkshire’s been out of favor, it trades at bargain prices.

Those with long enough memories will recall that Buffett also got out of the market, built up his cash reserve, and waited during the run up to the dot com crash. His comment was that the market did not make any sense.
Individual stocks that comprise the bulk of the Berkshire Hathaway portfolio include Apple, Coca Cola, and a collection of financials including Bank of American, S. Bancorp, American Express, JP Morgan Chase, and Wells Fargo. All of these have taken hits in recent weeks but all or solid investments that will likely reward anyone who buys them at depressed prices and holds them for the long term.

However, the major argument for choosing Berkshire Hathaway itself is that you get Buffett’s expertise and that of his associates such as Charlie Munger. These old guys have been around for decades, tend to anticipate situations like we are in now and routinely walk away with long term profits.

Although there are and will be numerous investment opportunities during this market crash and in the months and years to come, we have to agree with The Motley Fool that picking Berkshire Hathaway Class A or Class B shares and holding on is probably one of the better stock investing options today.

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Is Berkshire Hathaway a Good Investment?

Best Investments for New Investors Today

Over the long run, the US stock market is the best money-making vehicle available to the majority of investors. However, the entire market, whole investment sectors, and individual investments all have good and not-so-good periods. That being the case, what are the best investments for new investors today?

The Motley Fool has a good article about stocks to choose if you start investing in 2020.

One of the best ways to [make money in stocks] is to start with the stocks of strong, easy-to-understand businesses. This will make it easier for you to track the progress of your companies, which, in turn, will help you better determine when to buy and sell their stocks. Additionally, strong businesses tend to perform well over the long-term, even if you don’t buy them at the most opportune time.

Their five choices are Apple, Chipotle, Netflix, Planet Fitness, and Grocery Outlet. Despite their suggestion to choose easy-to-understand businesses, only the first three fit that recipe. Planet Fitness and Grocery Outlet use new approaches in old and established business sectors. Our take on their list is that Apple, Chipotle, and Netflix are good choices and Planet Fitness and Grocery Outlet are a bit more speculative.

Although Netflix is on a roll, it will have increasing competition from the likes of Disney, which is a stock that goes on our own list of safe investments for beginners. Apple became a holding of Berkshire Hathaway when Warren Buffet decided that its strong brand name and dedicated customer base differentiated it from other tech stocks. Chipotle has a well-run business and is growing, but like McDonald’s, it will need to constantly make adjustments to its menu and operations to stay ahead of competitors. Nevertheless, any or all of these three stocks would be good investments for new investors.

Choosing Investments for New Investors

When a new investor starts out with “household name” stocks, they still need to do a bit of homework to make sure that they are good investments. Companies that have been paying dividends and increasing their dividends over the decades are usually safe choices. Companies that have strong cash flow attract investors but tend to be overpriced. The key to investing in stocks is the ability to analyze intrinsic stock value. With this approach, an investor looks at the potential of a company to keep making money with its business plan into the distant future. He or she compares the stock price that this sort of fundamental analysis would predict with the current stock price. When the intrinsic value thus derived exceeds the current price of the stock, those are sound long term investments for new investors.

What is realistically attainable in the stock market?

Buffett is widely regarded to have the best long-term performance of any investor alive today, and over the past 30 years the book value of his company, Berkshire Hathaway BRK.A, +0.30% has grown at a 17.7% annualized rate. Impressive as that is, it’s not nearly high enough to enable you to make it on to the Forbes list – unless you start with a lot of money at the outset.

The threshold to make it on to this year’s list, for example, is $1.7 billion. Let’s say your net worth by the age of 30 is $1 million. A 17.7% annualized return from then until age 65 would produce “only” $300 million.

More importantly realistic investment expectations are that you will match the average equity fund with a roughly 8% per year growth rate. That will grow your million dollars to fifteen million from age 30 to age 65. Billionaires invest in stocks in order to maintain the purchasing power of what they have earned by founding a company, growing it and taking a public!

Expectations and Risk

Common wisdom is that you can accept more risk in your investments when you are young because you have time to make up for your losses whereas you should avoid risk as you approach retirement. The Motley Fool looks at investment risk.

Before you can invest responsibly, it’s important to take a long look at your risk tolerance — that is, how much volatility are you willing to deal with in the pursuit of investment gains? I wish there was a simple answer to this question, but risk tolerance depends on a variety of factors, including your age, your personality, and why you’re investing.

Traditionally risk adverse investors buy bonds but in today’s low interest rate environment you can lose a lot of money investing in bonds just before rates go up.

Realistic Expectations from the Start

Years ago we wrote about learning how to invest.

A beginning investor needs to think of having a stable platform from which to invest. Simply speaking this means paying off credit card debt and having sufficient cash reserves for mortgage payments, food, utilities, and other needs sufficient for several months.

Realistic investment expectations need to include the possibility of substantial losses in the event of a major market crash, war or social unrest. Having your bills paid off and money in the bank for a few months of expenses is the point from which to start investing.

Realistic Stock Investment Expectations PPT

Profitable Investments

Some time back we wrote about investment and the Panama Canal expansion. One cannot invest directly in the new and much larger set of locks they are building for the Panama Canal. But one can consider the consequences of the project. There are broad implications to investment up and down the Atlantic coast of the Americas. Shipping experts expect to see substantial and permanent changes in shipping patterns and trade once the so called third lane construction of substantially larger locks and widened shipping channels is completed in 2015. Whether your interest is to invest in middle class growth in Latin America or a resurging North American economy a close look at the Panama Canal expansion will be useful. The new locks will be 55 meters wide by 407 meters long. So called “cape size” vessels will soon be able to pass through the Isthmus of Panama and avoid the long and costly transit around Cape Horn, the southernmost point of South America. Consider which shippers (think Maersk Sea Land, etc.) will benefit from sending big boats through the new canal locks. And consider East coast port investment as ports from Newark to Buenos Aires build bigger cranes for off-loading bigger ships.

Safe Investments

Safe investments include US Savings Bonds. These bonds are backed by the full faith and credit of the US government. But they are not tradable. US Treasury bills on the other hand are tradable. Thus, if you buy when interest rates are high you can reap a profit by selling when rates fall. You can make money investing in US Savings Bonds and US Treasuries but commonly you will barely stay ahead of inflation. The issue is how to gain profits when the world changes as in investing in opportunities that emerge from the Panama Canal expansion and retain some of the safety of investing in US Savings Bonds.

The Best Mix of Profit Potential and Safety

Two principles should drive all investing, intrinsic value and margin of safety. The intrinsic value of stock is its anticipated future earnings discounted to current value. The same thinking can be applied to the intrinsic value of overseas investments, investing in gold, or investing in real estate around the corner. Using the Panama Canal expansion as an example, the project is large, real, and easy to follow by visiting the web site of the Panama Canal Authority. The news is full of items related to this project. Analyze the fundamentals, consider the margin of safety of a real bricks and mortar project, and diversify your portfolio to take advantage of the various aspects of this opportunity, shipping, freight handling, and economic growth across the Eastern shores of the Americas.

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Picking a Foreign Stock

There are two general routes when investing in foreign stocks. One is to look for a market that is likely to grow. If you believe that you can make money by investing in Latin America you may look for stocks issued in Brazil or Mexico. A viable choice might be oil stocks, especially in Brazil as recent oil finds bring its reserves to the level of Saudi Arabia. Using the theory that a rising tide raises all ships, you believe that the more important factor is the strength of the emerging market more so that the strength of the individual stock. The other route is to look for individual companies that are strong in their nation of origin and, perhaps, are exporters of goods and services to the world. In this case, issues such as a fall in currency value in a nation may be helpful both in making a stock cheaper to buy and in making the underlying company more competitive in world markets. A company like Siemens comes to mind if investing in foreign stocks in Europe is something that interests you. At times when the Euro is weaker the stock may be a bargain. At the same times Siemens’ products and services may sell better across the globe because they will be more price competitive.

Tracking Foreign Stocks

A level 3 ADR is the most secure for an investor. These companies must adhere to the strictest set of rules when offering stock in the USA. They are issuing stock to raise capital in the USA and must adhere to SEC rules consistent when what US based stocks must do. Fundamental analysis of level 3 ADR’s is easier because of the English language materials which the company must furnish investors.

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What Is the Deal with the Affordable Care Act?

Lawmakers passed the so called Obamacare act in response to the fact that a huge portion of Americans do not have health insurance (around 50 million) and basically cannot afford it. There certainly seemed to be a need to fix what seemed to be broken. Rather than opt for a nationalized health care system the Affordable Care Act goes through private insurers. The idea was to organize the system, cut out a lot of the excess costs that ended up at profits for the insurers, and give everyone a chance to buy insurance. The problem is that healthy people are prone to not buy insurance. The law mandates that insurers have to cover anyone who wants insurance. This means that a person who didn’t pay premium for the last twenty years and now has cancer can walk in and buy health insurance at the standard rate. This drives up the cost of insurance. Obamacare has a way to fix this. They are going fine you, with increasing fines, if you do not buy health care. That is where the Supreme Court enters the picture. If the court decides that this provision of the law usurps “police powers” which are limited, under the constitution, to the states, Obamacare will be gone. It may be possible to profit from the end of Obamacare if it goes away and if you, the investor, do a little research into which companies stand to lose. Picking new winners in the health insurance field may require a little study into just how the system will work in the post Obamacare era.

Who Stands to Lose with the Demise of Obamacare?

Think of these guys:

Aetna, AET, $46 a share

CIGNA, CI, $49 a share

Humana, HUM, $91 a share

Health Net, HNT, $40 a share

UnitedHealth Group, UNH, $59 a share

Wellpoint, WLP, $72 a share

The Affordable Care Act could be struck down in its entirety or the “Commerce Clause” portion that stipulates fines for nonparticipation could be struck down. In either case congress will need to deal with the issue again. And, the insurers and HMO’s that were planning on big profits from an enlarged insurance pool will need to recalculate. These companies have put a lot of effort into organization. They may need to cut back on expenses and deal with reduced reserves. To profit from the end of Obamacare an investor may choose to buy puts on one or more of the stocks listed above, prior to the Supreme Court ruling in June. They may choose to wait for a ruling and see if any of the stocks listed above start to fall. The point of this discussion is not to advise for or against investment in any of the insurance/hmo stocks listed above. It is to stimulate thought and, hopefully, to result in profitable investing. As always do your fundamental analysis and don’t invest unless you understand what you are doing.

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The US Market is Recovering. Will Emerging Markets Follow?

A general observation that many have made recently is that the US stock market has made up for last year’s losses but markets throughout the world have not. This is despite the fact that many economies are growing at faster rates than that of the USA. Remember that many offshore investments were overpriced before the market crash. Everyone seems to have been looking for exceptional return on investment. Thus investors put their money into hedge funds as well as non-transparent offshore investments. Many who chose either of these routes no longer have the investment capital with which to repeat their mistakes. Picking a strong company in an emerging market is part of today’s value investing. Picking a non-transparent stock with allegedly strong growth figures is just throwing darts.

Many smart long term investors only invest in a stock when they understand just what the company does to make money. When an investor cannot find a clear and honest financial statement of costs, cash flow, and income it may be smart to avoid the stock in question, no matter whether it is in a rapidly growing market or not. Picking new winners in the world economy is more than just throwing money at growth figures. It requires information as good as one would use to invest in US stocks.

Many emerging market economies are commodity driven. To the extent that strict austerity measures in Europe slows down growth and the housing bubble in China bursts, economies based on raw material exports will probably not be where you want to invest. Investment in a China with lower growth targets ought to be more conservative that previous attempts to throw money at Chinese stocks in search of a miracle.

Follow the Money and the Emerging Middle Class

In many regions of the world the middle class is growing and asserting itself. Today’s investor can easily invest in US stocks that benefit from this demographic phenomenon. Walk through a supermarket in Panama City, Panama, Bogota, or Buenos Aires and you will see familiar US brands. Whether the lady of the house calls it “cloro” or “Clorox,” she still buys bleach. Procter and Gamble sells Tide, Gillette razor blades, and a huge number of products to a growing middle class virtually everywhere. Cisco routers are sold internationally. These companies will very likely profit from an accelerating global economy and they are stocks that US investors should find easy to evaluate. No matter which of the best places on earth to invest interests you, remember that how to invest in stocks profitably requires consideration of safely as well as growth potential.

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At lot is made about the fact that Steve Jobs in gone. Those who choose to invest in Apple for the dividend may well believe that the creative spark in Apple died with its cofounder. However, the co-founder and former CEO of Apple was not the only creative mind in the company. Apple will likely continue to produce great products that everyone wants to have. However, there is such a thing as market saturation. Apple makes great products. But, for much of the world, if not most of the world, they are too expensive. And, competition could get tougher for Apple if it gets into the world of mid-priced consumer electronics. The implication of this line of reasoning is that Apple may well continue to wow us with new and innovative products. It may well continue to create a healthy income stream. It may be able to pay healthy dividends and even raise its stock price a bit by repurchasing its stock. But the time to invest in Apple for the dividend, instead of for expected growth, might well have come. When investing in companies with cash, investors look for stability and cash flow more so than growth.

One issue for the immediate term is that Apple stock has gone up by half since Steve Jobs passed away. Part of this has likely had to do with successful product launches. Part may have had to do with previous concern about a transition after the expect death of the former CEO. With a successful transition investors may well be reassured that the company will not just fall apart. But, even with its upcoming dividend and stock buyback plan, Apple will hold over $50 Billion in cash and cash equivalents and will be adding on as it goes. It holds substantial offshore assets as well and will likely not repatriate these unless there is a change in the tax law. Whether you choose to invest in Apple for its product innovation or invest in Apple for the dividend depends on whether you think that the company will come up with a product or two than no one currently imagines, which everyone will want to have, and which lots of folks will be able to afford. Fundamental analysis will need to support positive investor sentiment if investors are going keep driving Apple stocks price upward.

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For the investor interested in picking up growing companies, buying companies with strong balance sheets, or investing in companies with cash, there are lots of companies to pick from. If the investor wants profitable, growing, cash rich companies at great stock prices that is another matter. Investors pay a premium for value and great stocks commonly have high price to earnings ratios. Thus many successful investors keep a list of stocks that they have researched. This list includes stocks with two characteristics. One is intrinsic stock value, the growth and earning potential of the company. The other is margin of safety in the form of cash reserves, absence of debt, and unencumbered tangible material assets such as production facilities and real estate, patents, oil or mineral reserves, and other valuable assets not currently producing profit. Such stocks are commonly priced on the high end of the spectrum. These stocks become a much better deal as the market falls, when buying them becomes a way to profit from a stock selloff. Companies like Berkshire Hathaway are commonly in the news when they purchase huge blocks of stock, preferred stock, or whole companies as stock prices fall across the board. Their purchases are certainly not random. The targets of these purchases and takeovers are well researched stocks with intrinsic stock value and a margin of safety.

Successful long term investors know a lot about their stocks. They understand why a stock price has risen and they understand why a stock price falls. When the market falls due to general expectations of bad economic times the stock selloff often takes good stocks down with the bad. The sales and income of a company selling basic consumer products or groceries will commonly not drop off when a recession hits. No matter what the debt rating of the EU or the USA, people will buy hand soap, laundry soap, beans, rice and potatoes. A smart investor knows what his company makes and how its sales will be affected by a recession, how its expansion plans will be affected by a rise in interest rates, and if its research and development efforts are likely to be affected by a need to conserve cash. In order to profit from a stock selloff the successful investor always asks himself what is a good investment based on fundamentals. If a previously expensive but good stock is now very fairly priced it provides a means to profit from a stock selloff even while other investors are running for the door.

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The center of this “investing in Microsoft patents” dispute is Android. The Google purchase of Motorola (its handset division) was all about obtaining the rights to the treasure trove of patents that the company possessed and was not successfully monetizing. Android is the name for an operating system for devices such as tablet computers and smart phones. It is open source software. Because of the dominance that Microsoft has developed over the years in person computing it effectively bars many users from benefiting from the advancements of the computer age unless they buy patented Microsoft products for virtually every conceivable application. A longstanding reaction to this situation is the organized development of open source software. This is computer code that is developed publically and available at no cost. Use of such software, such as versions of Linux, is said to save users upwards to $60 Billion a year. Google went this route in first acquiring Android Inc., in 2005. It developed the Open Handset Alliance, more than eighty companies developing both software and hardware for telecommunication. Within this framework is the Android Open Source Project (AOSP). The point of this work is to advance computer science but also to bypass the massive number of patents held by Microsoft. Many consider Android to be the best smart phone platform in the world and as of 2010 had nearly two hundred million users. Investors will want to follow this story as it unfolds because it will help determine if investing in Microsoft and investing in Microsoft patents will prevail or if other companies will be able to use already-developed technology, for free, in promoting the open source Android platform and other technologies yet to come.

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