Trillion Dollar Berkshire
A penny for Warren Buffett's thoughts as Berkshire Hathaway reaches new heights
Berkshire Hathaway is now a $1 trillion company — capping off an incredible run for the Omaha-based conglomerate over the past year or so.
It was only last September that Berkshire reached an $800 billion market cap for the first time. And just six months since conquering the $900 billion level. Companies of Berkshire’s size (and risk profile) aren’t supposed to fly up the charts this fast.
Both the Class A and Class B shares are up more than 31% so far this year — far outpacing the benchmark S&P 500 index.
They don’t show any signs of slowing down, either. According to CNBC’s Warren Buffett Watch, “the Class A and Class B shares have closed at fresh all-time record highs for seven straight sessions”.
These are heady days for Berkshire Hathaway.
It’s easy to become desensitized to big numbers when following a company like Berkshire. Just last week, when writing about the $151,745 dividend from Jefferies Financial Group, I scoffed to myself that such a paltry amount is meaningless.
Only to remember that that’s much more than I make in an entire year and would be life-changing money to me and plenty of other people.
As such, we shouldn’t brush over the fact that Berkshire is now worth over $1 trillion. That’s twelve zeroes, by the way, for anyone counting at home.
Or, to put it another way, one billion seconds is 31 years. A trillion? 31,000 years.
It’s a number that would have been scarcely imaginable when Warren Buffett started buying bargain-priced shares of Berkshire for his partnership nearly six decades ago. How could a failing New England textile operation transform itself from a discarded cigar butt into one of the most admired (and valuable) companies in the world?
Well, they don’t call him the Oracle for nothing.
The Trillion Dollar Club is rarefied air in the business world. Apple got there first in 2018, before being joined by other tech titans like Microsoft, Alphabet, Amazon, Meta Platforms, and Nvidia. Until Berkshire’s entry last week, Saudi Aramco had been the only non-tech member. It’s truly the elite eight of capitalism.
Many people — including me — called Berkshire’s ascent to $1 trillion an early birthday present for Warren Buffett.
Although, if I’m being honest, I’m not sure that he sees it that way.
The mind-boggling size of Berkshire Hathaway’s cash holdings — $271 billion at last check — is Exhibit A in how difficult it has been for Warren Buffett to find attractive investment and acquisition opportunities in recent years.
One exception to that has been share repurchases. Since unshackling Berkshire’s buyback policy from book value in 2018, Buffett has chosen to allocate capital in this manner with increasing regularity. In fact, share repurchases have soaked up more than $70 billion of Berkshire’s cash in the last five years — providing Buffett an outlet at a time when elephant-sized acquisitions were in short supply.
Berkshire’s recent price surge, though, has shut off the buyback spigot.
Since June 1, Berkshire’s Class A shares are up 14% — and share repurchases have, in turn, ground to a halt. There were no buybacks in June, none in the first three weeks of July, and (presumably) none in the six weeks since.
Unlike so many others, Buffett only buys back stock when the price is right. “Berkshire’s common stock repurchase program permits Berkshire to repurchase its shares any time that Warren Buffett believes that the repurchase price is below Berkshire’s intrinsic value, conservatively determined,” says the company’s 10-Q.
Below intrinsic value. Conservatively determined.
Knowing Buffett, he takes those two criteria very seriously.
So it seems reasonable to assume that, at current prices, Buffett no longer judges Berkshire to be far enough under intrinsic value to merit share repurchases.
(Another possible explanation is that he has diverted capital to a more compelling investment opportunity elsewhere — either via public markets or private acquisition. That would be awesome, but not especially likely.)
Plus, with share repurchases on pause, Berkshire’s cash mountain will likely grow to ever more epic proportions. Even if Buffett has stopped selling Apple at 400 million shares — which is far from a sure thing — he has already offloaded more than $6 billion of Bank of America stock in the third quarter. Unless Buffett has something pretty big up his sleeves, we might be hitting the $300 billion cash mark sooner than anyone thought.
(That’s cool with me — the more cash the merrier, as far as I’m concerned — but I know that many shareholders are uneasy with the size of Berkshire’s cash holdings.)
Okay, that’s the bear case for $1 trillion.
Now, on to some happier reading…
While I understand the angst over the impact that Berkshire’s rising price has had on share repurchases, I cannot get on board with those who want the Class A and Class B shares to remain perpetually undervalued.
Such a situation is great news for buybacks and for anyone seeking to build a position in the conglomerate, but that’s only a portion of the current shareholder base.
Over the years, Berkshire has attracted a diverse group of shareholders from all walks — and all stages — of life. For every young investor looking to add shares at the best possible price, there is an older one who has stuck with Berkshire for decades and now might need to use those shares to fund retirement or other late-life expenses.
Berkshire famously does not pay a dividend, so the only way for those people to get income out of the stock is to sell a portion of their holdings. It’s sort of a roundabout way to create your own dividend.
wrote a great article about this.We shouldn’t ignore that everyone is at a different stage of their investing journey. While some dream of passing on a carefully curated portfolio of blue-chip names to the next generation, others invested in order to finance their golden years.
Let’s not lose sight of those who rely on Berkshire’s stock price remaining close to intrinsic value. No long-term Berkshire shareholder should have to live retirement at a discount just so that a few more shares can be bought back next quarter.
Another consideration: Warren Buffett’s consistent ability to crush the index is a big part of why he’s so admired today. His legend is built on compounding Berkshire’s value at close to 20% annually for six decades. And even better results for his friends-and-family partnership before that.
If not for this relentless outperformance, Buffett’s letters would not be as widely-read as they are and Berkshire’s AGMs would not draw comparisons to Woodstock.
As such, Berkshire becoming the first non-tech company in the U.S. to join the Trillion Dollar Club is a big deal.
Milestones matter.
Berkshire at $1 trillion will drive countless media headlines that, in turn, will bring Buffett’s name and example to more people. At a time when there are so many bad financial ideas out there, that can only be a good thing.
In terms of this newsletter, I like to have my cake and eat it too.
When Berkshire’s stock drops, I relish the share repurchases that make all of our ownership stakes that little bit bigger.
And, when the price soars, it’s gratifying to know that long-term shareholders will enjoy a better retirement funded by dividends that they create themselves. And that positive coverage of Buffett and his latest milestone will spread the good word of Berkshire to more and more people. We all win when that happens.
I’m happy up here on this fence and you can’t make me get down.
Warren has always sought to have Berkshire trade close to fair value. To the extent that it does, that removes speculators who seek to buy low and sell high—and often end up doing the opposite—and it attracts owners, whom Warren treats as partners. Under that regime, one is rewarded for the performance of the business, not the stock. He once said to me: if you do 20% for 20 years, you will be rich—I didn’t reveal to him how puny my beginning stake was…, but the math is solid.
But Warren has also advised us not to disparage a manic-depressive market, fore it will produce ripe fruit for the picking. We just need to be patient.
In my opinion, one of the reasons that Berkshire did not repurchase shares for many years, and why the pre-2018 authorization was restricted to very low price-to-book ratios is because Buffett was historically uneasy with the idea of buying out partners as well below intrinsic value. In some ways, I think that Berkshire’s inclusion in the S&P 500 around the time of the BNSF acquisition changed the psychology of repurchases for Buffett and Munger since the shareholder base would inexorably shift from longtime individual owners to index funds.
But overall, Buffett and Munger always wanted Berkshire to trade near intrinsic value to facilitate fairness to new and departing owners. The communications in the letters and meetings always try to get to that result but Mr. Market is rarely rational.
Thanks for including a link to my article.