Business
Financial analysis: The power of compounding
Image: Rizzo, Farrugia & Co. (Stockbrokers) Ltd
In my articles over the years, I wrote about Warren Buffett and Berkshire Hathaway Inc. on various occasions. In recent weeks, both Buffett and the company he manages hit the headlines several times and in today’s article, it would be timely to highlight these recent developments and milestones.
Only last week, just a few days before Buffett celebrated his 94th birthday, Berkshire Hathaway surpassed a market capitalisation of US$1 trillion for the first time ever. This milestone was given wide publicity internationally since it is the first company in the US, with the exception of most of the so-called ‘Magnificent 7’, to reach such a remarkable valuation. Berkshire Hathaway now ranks as the seventh largest publicly traded company in the US after Apple, Nvidia, Microsoft, Alphabet, Amazon and Meta.
Buffett began managing Berkshire Hathaway in 1965 and the company’s Class A shares began trading in 1980. It therefore took 44 years since the public share listing for the company to achieve such an important
milestone. In May 1996, Berkshire Hathaway introduced Class B shares in order to make the company more accessible to a broader range of investors since the original Class A shares were already trading at a high absolute price per share. Buffett still owns more than 14% of the issued share capital of Berkshire despite having donated more than half his shares to charity since 2006. His fortune is estimated at over $145bn, ranking him among the richest persons worldwide.
Earlier last month, Buffett and Berkshire Hathaway Inc. also hit the headlines due to some notable sales of the sizeable holding of Apple shares and other securities within the company’s investment portfolio.
Given Buffett’s status as one of the world’s most renowned stockpickers, the changes in the portfolio of Berkshire Hathaway are greatly scrutinised by several market commentators. Buffett is known for his “buy and hold” philosophy, investing in solid businesses and maintaining his stakes for years or even decades.
One of Buffett’s famous phrases is that “the stock market is a machine that transfers money from the inpatient to the patient” and “in the short term, the market is a voting machine, but in the long term it is a weighing machine”.
Although the changes in the portfolio of investments in publicly-traded shares are given most publicity across the media, it is also fair to highlight that Berkshire Hathaway also has a portfolio of over 60 wholly-owned subsidiaries across industries such as insurance (GEICO), railroads (BNSF), utilities and consumer goods (Kraft Heinz) among others. During the first half of 2024, these businesses generated a profit of $22.8bn, representing an increase of 26% from the previous comparative period and indicating the company’s ability to generate a strong income stream from these subsidiaries.
The second quarter financial statements issued on August 3 also showed that during the three-month period until June 30, Berkshire Hathaway had sold several equities amounting to a staggering $77.2bn (and during the same period purchasing other equities for a value of ‘only’ $1.6bn) with the resultant effect that the company’s cash position surged to a record of almost $277bn.
Start investing at an early age, remain consistent and let time work in your favour
Berkshire Hathaway almost halved its sizeable stake in Apple Inc. The company had started investing in the iPhone manufacturer in 2016 and until recently it accounted for almost half of its $360bn portfolio of investments. The overall cost of the investment in Apple over the years reportedly amounted to circa $36bn.
As at December 31, 2023, Berkshire’s stake in Apple was valued at $174.3bn (almost five times its initial cost). The investment in Apple was reduced to $135.4bn during the first quarter of 2024 and to $84.2bn as at June 30, 2024. Some market commentators have recently also speculated that Berkshire’s stake in Apple continued to reduce since then, although nothing has been made official and this information will only be reported once Berkshire publishes its Q3 results which are due on November 4.
Buffett has not publicly disclosed the reason for the surprising and aggressive stance towards the sizeable decline in the stake in Apple. Possibly, the most plausible is that the investment in Apple was too dominant within Berkshire’s portfolio. Other commentators speculated that the sharp reduction in the equity portfolio which generated handsome capital gains was done in view of the possibility of the introduction of higher capital gains taxes in the years ahead.
Separately, it was recently reported that Berkshire Hathaway also reduced its stake in Bank of America which ranked as Berkshire’s second-largest holding within its investment portfolio. Most recent data indicates that Berkshire sold over $5bn worth of Bank of America shares but despite this, Buffett’s investment vehicle remains the bank’s largest shareholder.
Most of the cash reserves held by Berkshire are invested in short-term treasury bills issued by the US government. During the company’s latest annual meeting in May, Buffett described them as “the safest investment there is”. The CEO of Berkshire stated that the company would “love to spend” its cash but would not do so unless it could find “something that has very little risk and can make us a lot of money”.
The outstanding success of Berkshire over the past 60 years underscores Buffett’s wisdom and patience in investing, demonstrating the remarkable power of compounding. Since Buffett took over Berkshire in 1965, the company’s book value per share, which is a good proxy for measuring changes in Berkshire’s intrinsic value, increased at a compound annual growth rate (CAGR) of almost 20%, which is well above that of the S&P 500 index during the same period. Essentially, an investment of $100 into Berkshire in 1965 would have grown to a current value of over $4.3m.
This achievement cements Buffett’s legacy as one of the greatest investors in history. The company’s success is built on fundamental principles that Buffett has championed for decades − investing with discipline, understanding what you own and focusing on long-term growth rather than short-term speculation.
Compounding (which Albert Einstein had described as the eighth wonder of the world) is a powerful tool that can help investors build significant wealth over time, regardless of the amount of money one starts off with. The key is to start investing at an early age, remain consistent and let time work in your favour. This is the biggest advantage of having an allocation to equities within a long-term portfolio as opposed to one solely based on fixed-income securities.
The compounding effect over a long period of time from the equity component is generally what enables investors to achieve growth in an investment portfolio since inflation erodes the value of bonds as an investor gets back the capital value upon maturity.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2024 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
Image: Rizzo, Farrugia & Co. (Stockbrokers) Ltd
In my articles over the years, I wrote about Warren Buffett and Berkshire Hathaway Inc. on various occasions. In recent weeks, both Buffett and the company he manages hit the headlines several times and in today’s article, it would be timely to highlight these recent developments and milestones.
Only last week, just a few days before Buffett celebrated his 94th birthday, Berkshire Hathaway surpassed a market capitalisation of US$1 trillion for the first time ever. This milestone was given wide publicity internationally since it is the first company in the US, with the exception of most of the so-called ‘Magnificent 7’, to reach such a remarkable valuation. Berkshire Hathaway now ranks as the seventh largest publicly traded company in the US after Apple, Nvidia, Microsoft, Alphabet, Amazon and Meta.
Buffett began managing Berkshire Hathaway in 1965 and the company’s Class A shares began trading in 1980. It therefore took 44 years since the public share listing for the company to achieve such an important
milestone. In May 1996, Berkshire Hathaway introduced Class B shares in order to make the company more accessible to a broader range of investors since the original Class A shares were already trading at a high absolute price per share. Buffett still owns more than 14% of the issued share capital of Berkshire despite having donated more than half his shares to charity since 2006. His fortune is estimated at over $145bn, ranking him among the richest persons worldwide.
Earlier last month, Buffett and Berkshire Hathaway Inc. also hit the headlines due to some notable sales of the sizeable holding of Apple shares and other securities within the company’s investment portfolio.
Given Buffett’s status as one of the world’s most renowned stockpickers, the changes in the portfolio of Berkshire Hathaway are greatly scrutinised by several market commentators. Buffett is known for his “buy and hold” philosophy, investing in solid businesses and maintaining his stakes for years or even decades.
One of Buffett’s famous phrases is that “the stock market is a machine that transfers money from the inpatient to the patient” and “in the short term, the market is a voting machine, but in the long term it is a weighing machine”.
Although the changes in the portfolio of investments in publicly-traded shares are given most publicity across the media, it is also fair to highlight that Berkshire Hathaway also has a portfolio of over 60 wholly-owned subsidiaries across industries such as insurance (GEICO), railroads (BNSF), utilities and consumer goods (Kraft Heinz) among others. During the first half of 2024, these businesses generated a profit of $22.8bn, representing an increase of 26% from the previous comparative period and indicating the company’s ability to generate a strong income stream from these subsidiaries.
The second quarter financial statements issued on August 3 also showed that during the three-month period until June 30, Berkshire Hathaway had sold several equities amounting to a staggering $77.2bn (and during the same period purchasing other equities for a value of ‘only’ $1.6bn) with the resultant effect that the company’s cash position surged to a record of almost $277bn.
Start investing at an early age, remain consistent and let time work in your favour
Berkshire Hathaway almost halved its sizeable stake in Apple Inc. The company had started investing in the iPhone manufacturer in 2016 and until recently it accounted for almost half of its $360bn portfolio of investments. The overall cost of the investment in Apple over the years reportedly amounted to circa $36bn.
As at December 31, 2023, Berkshire’s stake in Apple was valued at $174.3bn (almost five times its initial cost). The investment in Apple was reduced to $135.4bn during the first quarter of 2024 and to $84.2bn as at June 30, 2024. Some market commentators have recently also speculated that Berkshire’s stake in Apple continued to reduce since then, although nothing has been made official and this information will only be reported once Berkshire publishes its Q3 results which are due on November 4.
Buffett has not publicly disclosed the reason for the surprising and aggressive stance towards the sizeable decline in the stake in Apple. Possibly, the most plausible is that the investment in Apple was too dominant within Berkshire’s portfolio. Other commentators speculated that the sharp reduction in the equity portfolio which generated handsome capital gains was done in view of the possibility of the introduction of higher capital gains taxes in the years ahead.
Separately, it was recently reported that Berkshire Hathaway also reduced its stake in Bank of America which ranked as Berkshire’s second-largest holding within its investment portfolio. Most recent data indicates that Berkshire sold over $5bn worth of Bank of America shares but despite this, Buffett’s investment vehicle remains the bank’s largest shareholder.
Most of the cash reserves held by Berkshire are invested in short-term treasury bills issued by the US government. During the company’s latest annual meeting in May, Buffett described them as “the safest investment there is”. The CEO of Berkshire stated that the company would “love to spend” its cash but would not do so unless it could find “something that has very little risk and can make us a lot of money”.
The outstanding success of Berkshire over the past 60 years underscores Buffett’s wisdom and patience in investing, demonstrating the remarkable power of compounding. Since Buffett took over Berkshire in 1965, the company’s book value per share, which is a good proxy for measuring changes in Berkshire’s intrinsic value, increased at a compound annual growth rate (CAGR) of almost 20%, which is well above that of the S&P 500 index during the same period. Essentially, an investment of $100 into Berkshire in 1965 would have grown to a current value of over $4.3m.
This achievement cements Buffett’s legacy as one of the greatest investors in history. The company’s success is built on fundamental principles that Buffett has championed for decades − investing with discipline, understanding what you own and focusing on long-term growth rather than short-term speculation.
Compounding (which Albert Einstein had described as the eighth wonder of the world) is a powerful tool that can help investors build significant wealth over time, regardless of the amount of money one starts off with. The key is to start investing at an early age, remain consistent and let time work in your favour. This is the biggest advantage of having an allocation to equities within a long-term portfolio as opposed to one solely based on fixed-income securities.
The compounding effect over a long period of time from the equity component is generally what enables investors to achieve growth in an investment portfolio since inflation erodes the value of bonds as an investor gets back the capital value upon maturity.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2024 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
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