Legendary investor Warren Buffett doesn't invest on behalf of clients, but his holding company Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.73%) is the next best thing. After decades of acquiring dozens of privately held businesses and stakes in public corporations, the publicly traded behemoth is one of the world's largest companies.
Buffett has carefully built Berkshire Hathaway to last long after he's gone, always maintaining a long-term vision at the company that's helped the stock outperform the S&P 500 over the years. But this giant, worth nearly $900 billion, isn't a buy at any price.
Your price will probably have much to do with your investment returns over the coming years. Here is what you need to know.
Berkshire is built for forever
Berkshire Hathaway is truly a special company. It's a holding company that doesn't actually do anything aside from maintaining ownership of all its subsidiaries and allocating capital. Berkshire is a machine with many parts. Its parts are made of business units, including:
- Insurance underwriting
- Insurance investment income
- Railroad
- Utilities and energy
- Other businesses and miscellaneous items
Collectively, all these units feed profits to Berkshire's bottom line, which Buffett and management allocate based on the best long-term interests of shareholders.
Berkshire Hathaway owns dozens of enterprises and a roughly $350 billion stock portfolio. It is famous for its massive stake in Apple and longtime holdings like Coca-Cola and American Express. Overall, the portfolio alone is worth over $350 billion.
This diversification and massive size make Berkshire a resilient business built to endure whatever the economy throws at it. Over the years, this has included a financial crisis, multiple recessions, wars, and a pandemic.
If that wasn't enough, Berkshire also stacks a ton of cash on its books for that rainy day or fat-pitch investment opportunity. There's currently $167 billion on the books, which alone would be one of the world's largest companies at that market cap. It's safe to say that Berkshire Hathaway can be bought and held indefinitely without losing a wink of sleep.
Why you value Berkshire by its book value
Evaluating the stock can be challenging because there are so many moving parts. Buffett himself has stated that GAAP income is virtually useless due to all the non-cash items that can affect the reported figures. So, instead, consider using Berkshire's book value to evaluate the stock.
A company's book value is its total assets minus its liabilities. What is left is its book value, sometimes called shareholder equity. It's the company's value after paying all the bills and debts.
Book value is a useful metric for evaluating Berkshire because it's easier to take a big-picture view of the business and total the cumulative value it has created.
Is Berkshire Hathaway a buy today?
More specifically, investors can check Berkshire's price-to-book ratio, which shows how much they pay for the business's equity. Over the years, Berkshire has traded at roughly 1.4 times its book value. Today, at 1.5 times, it's near the high end of its range over the past decade.
BRK.B Price to Book Value data by YCharts
Interestingly, Berkshire has traded within a pretty tight range, aside from severe market events like 2020's pandemic crash. The company's dependability means that investors who already own shares should keep them tucked away, as the stock's valuation isn't so egregious that it would warrant selling.
But if you're on the outside looking in, there's no rush to buy shares. The stock could stand to cool off a bit. Look to buy shares closer to Berkshire's long-term averages.
