Last week I wrote about not blowing all the money you save from frugal living. In that post, I introduced “Buying the B Share,” my goal of buying a B share of Berkshire Hathaway using nothing but the money I earn or save through frugal living. The B share trades at about $4,000 per share (note, since writing this article, the B share was split 50 to 1), so I set up a substantial goal for myself. What I didn’t explain is why I’ve chosen a B share of Berkshire Hathaway as my goal. Here is my explanation.
It's Not About Buffett
Under Warren Buffett’s leadership, Berkshire Hathaway has enjoyed a book value annual return of over 25%! It is for this reason that Warren Buffett is a household name. But Buffett won’t be around forever. The day will come when he retires to that great big bargain in the sky, and then we’ll all have a very big question to answer--Is Berkshire Hathaway still worth owning. My guess is that many will answer “No,” and the price of BRK will decline. It will be at this point, no doubt, that Buffett will be going crazy just wishing he could still buy an A share or two (currently trading at about $190,000 per share). And so anybody considering an investment in Berkshire Hathaway had better be able to justify the investment decision in a world without Mr. Buffett.
And that’s exactly what I’ve done. My analysis, however, doesn’t dive into the financial statements or evaluate the stocks Berkshire owns. Rather, my investing decision is based on the view that Berkshire is a great alternative to a mutual fund. There’s nothing new in equating Berkshire to a mutual fund, but I think Berkshire has at least four distinct advantages over most funds:
Mutual funds are expensive. Many cost more than 1% per year, and even the large index funds cost about 10 basis points or more. Berkshire’s costs are, for all practical purposes, zero. Yes Buffet gets a modest salary, and Berkshire spends about $6 million on administrative costs. But $6 million to manage a $100 billion firm is, well, zero.
Taxes are killing my non-retirement mutual fund investments. Because Berkshire doesn't pay dividends, there are no tax consequences unless and until I chose to sell. And even if the day comes when Buffett authorizes a dividend (which will happen), I still have complete control over when I pay capital gains taxes.
Berkshire Hathaway is a wonderfully diverse company. It owns equities in a wide range of industries, including such companies as The Washington Post, Coca-Cola, American Express and Lowes. In addition to equities, Berkshire has a number of wholly-owned subsidiaries, most notably in the insurance industry. Thus, a single share of Berkshire, like a mutual fund, provides exposure to many companies and industries.
For me, this is the most important point. A mutual fund manager has to choose which public companies he or she thinks will best perform. Berkshire is not so limited. It can invest not only in public companies, but it also can and does buy private concerns, too. Thus, when Buffett is looking for a bargain, he’s not limited to Wall Street. And given the price of shares lately, some of the best bargains won’t be trading on the big board.
So those are my reasons for choosing a B share of Berkshire as my savings goal. My question for you is whether you'd buy (or hold) Berkshire without Warren Buffett at the wheel?