Does Berkshire Hathaway Make The Cut As A “Retirement Stock”?

 

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Warren Buffett has made his investors a lot of money over his career. Over the past 35 years, Berkshire Hathaway (BRK.A) has grown its book value at a compounded rate of return of 19.0%. Over that same period, the S&P 500 has generated total returns of only 11.8%. For a manager as large and as closely followed as Buffett, those returns, spread out over three and a half decades, are nothing short of amazing.

Buffett has evolved over the years, moving from a deep value “cigar butt” investor into one that buys great businesses at reasonable prices. He also transformed Berkshire Hathaway twice: First from a textile mill into a diversified insurance company and then into the vast conglomerate. But while no one questions Buffett’s investment acumen or his ability to transform both himself and his company, whether or not Berkshire Hathaway makes the grade as a retirement stock is another question entirely.

Let’s start with the basics of what makes a good stock a “retirement stock.” To start, it should be a stable company in an industry or industries that are not too susceptible to technological upheaval. Remember, we’re looking for something to hang on to throughout your golden years.

Buffett has said that he buys companies that he would be comfortable holding if the stock market were to close for five years. In the age of smartphones and Uber taxis, those companies are harder to find. But they are definitely out there, and I would include Berkshire Hathaway among them.

Berkshire Hathaway has individual holdings – even large ones – that under attack from evolving technology. Perhaps the most visible is IBM (IBM). As IBM’s businesses has come under attack from cloud-based competitors, its sales have taken a hit, as has its share price.

But here is the beauty of Berkshire Hathaway. While IBM is one of its largest publicly-traded holdings, it makes up only 12% of Berkshire Hathaway’s portfolio and only 3.5% of Berkshire’s market cap. (Remember, much of its value comes from its non-publicly-traded holdings). The vast majority of Berkshire Hathaway’s holdings are indeed “technology proof” or at least technology resistant. A fine example is Buffett’s latest acquisition, Precision Castparts (PCP). Precision Castparts is…well…exactly what it sounds like: A precision maker of industrial parts and machinery for everything from aircraft to surgical implants. That’s not something a trendy smartphone app out of San Francisco can easily disrupt.

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