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3 Ways Warren Buffett’s Berkshire Hathaway Can Boost Long-Term Equity Portfolios

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  • BRK.B stock has risen more than 30% in the past year and hit an all-time high in May.
  • Berkshire Hathaway stock shows the potential of long-term investing and the magic of compound interest.
  • Despite potential short-term volatility in Q4, long-term investors may view any further short-term decline in BRK.B shares as a welcome entry point

Investors in Berkshire Hathaway B Stocks (NYSE 🙂 had a strong 2021 year. BRKb stock has risen almost 19% in 2021 and 30.6% in the past 12 months. Shares hit a record high (ATH) of $ 295.08 in May.

But since then they have lost around 6.5%.

The 52-week price range was $ 197.81 to $ 295.08, while the companyMarket capitalization (cap) stands at $ 416.3 billion.

Warren Buffett, one of the most successful investors of all time, sometimes referred to as “the Oracle of Omaha” because of his investment skills and foresight, is the Chairman and CEO of Berkshire Hathaway. He bought the Nebraska-based company in 1965 and over the past nearly six decades Buffett and his longtime partner Charlie Munger have overseen the spectacular growth of Berkshire Hathaway, turning the former textile maker into the largest company in diversified portfolio in the world.

Wall Street pays particular attention to Buffett’s views on the economy and the markets at large. Thus, its annual letters to shareholders receive special attention. With them, investors can also clearly understand how Berkshire Hathaway shares have performed over the years.

Between 1965 and 2020, Berkshire Hathaways’ compound annual gain was 20.0%. For the index, the return was 10.2% (including dividends). In other words, the proverbial $ 1,000 invested in Berkshire Hathaway in 1965 would have now reached around $ 28 million.

If the same amount had been invested in the S&P 500 at that time, it would now be around $ 235,000. Berkshire Hathaway thus shows the potential of long-term investing coupled with the magic of compound interest.

Readers interested in Berkshire Hathaway can purchase two types of shares, Class A (NYSE 🙂 shares and Class B shares mentioned above. For most retail investors, the main visible difference between the two types of shares is in the price.

On October 1, BRKb stock closed at $ 275.71. However, BRKa closed at $ 414,877.97 (no, it is not a printing error). In fact, BRKa currently has the highest share price of any company in history. Its market capitalization is almost $ 626.5 billion.

Considering the price of BRKa shares, most retail investors as well as exchange-traded funds (ETFs) naturally buy BRKb shares.

What Does Berkshire Hathaway Really Hold?

In early August, Berkshire Hathaway released Q2. Total revenue was $ 69,114 million. A year ago, that figure was $ 56,840 million. Net income was $ 28,425, compared to $ 26,407 in the second quarter of 2020.

Berkshire Hathaway owns several businesses, including an insurer Geico, the BNSF Railway, and See the candies. It also invests in listed companies, operating mainly in three segments:

  • Banking, insurance and finance (as of June 30, total fair value of $ 86,621 billion);
  • Consumer products (total fair value of $ 150.811 billion);
  • Commercial, industrial and other (total fair value of $ 70,510 billion)

Berkshire Hathaway’s regular 13F filings with the Securities and Exchange Commission (SEC) regularly detail the company’s public investments. Among Berkshire’s main holdings are Apple (NASDAQ :), Bank of America (NYSE :), American Express (NYSE 🙂 and Coca Cola (NYSE :).

What to expect from BRKb Store

Among 3 analysts questioned via Investing.com, the BRKb stock has a outperform the rating.

BRKb Consensus Estimates

The stocks have a 12-month price target of $ 328, which implies an increase of about 19% from current levels.

The P / E, P / S and P / B ratios of the BRKb share are respectively 6.09x, 2.39x and 1.34x. By comparison, the same ratios for Apple, its largest stake, are 27.94x, 6.79x, and 36.74x.

Investors looking at technical charts might be interested to know that a number of BRKb’s short and medium term indicators are giving signals of caution. However, the long-term uptrend of the stock is still intact.

So, if larger markets, especially Berkshire Hathaways’ larger holdings, were to come under further pressure, we could see BRKb shares drop to $ 265 or even $ 255, after which the stock could trade sideways while it is ‘it establishes a new base. In the event of such a decline, Berkshire Hathaway should find solid support around the $ 250 level.

Indeed, given the recent rise in prices, we would expect the stock to decline by around 5% in the near term. However, such a decline could provide a better entry point for buy-and-hold investors who expect growth to accelerate in the years to come.

3 possible transactions on BRK.B

1. Buy stock at current levels

Investors who are not concerned about daily price fluctuations and believe in the long-term potential of the company might consider investing in BRK.b stock now.

On October 1, Berkshire Hathaway closed at $ 275.71. Buy and hold investors should expect to hold this long position for several months as the stock tries again to hit the all-time high of $ 295.08. Then the next target would be the 12-month price target of $ 328.

Investors concerned about large declines might also consider placing a stop-loss around 3-5% below their entry point.

2. Buy an ETF with BRKb as the main asset

Many readers know that we regularly cover ETFs that might be suitable for buy and hold investors. So, readers who do not wish to invest capital in Berkshire Hathaway shares but would still like to have substantial equity exposure might consider looking for a fund that holds the company as their primary asset.

Here are examples of such ETFs:

  • SPDR Financial Select Sector Fund (NYSE :): this fund is up 29.4% since the start of the year and the weighting of the BRKb share is 12.14%;
  • Absolute Core Strategy ETF (NYSE: ABEQ): the fund is up 6.2% year-to-date and the BRKb share weighting is 8.56%;
  • Davis Select U.S. Equity ETF (NYSE :): the fund is up 16.5% year-to-date and the BRKb share weighting is 7.86%;
  • IShares MSCI USA Momentum Factor ETF (NYSE :): the fund is up 9.9% year-to-date and the BRKb share weighting is 4.25%.

3. Bear Put Spread

Readers who believe there could be more profit taking and a decline in BRKb stock in the short term might consider initiating a downward sell spread strategy. As these are options, this arrangement will not suit all investors.

It could also prompt long-term Berkshire Hathaway investors to use this strategy in conjunction with their long position in equities. The setup would offer some short-term protection against a price drop in the coming weeks.

This trade requires a trader to have a Berkshire Hathaway long option with a higher strike price and a Berkshire Hathaway short option with a lower strike price. Both put options will have the same expiration date.

Such a downward sales spread would be established for a net debit (or net cost). It will be profitable if the stock price of Berkshire Hathaway declines.

For example, the trader can buy an out-of-the-money (OTM) put option, such as the BRKb January 21, 2022 put option at 270 strikes. This option is currently available at $ 9.30. So, it would cost the trader $ 930 to own this put option, which expires in about four months.

At the same time, the trader would sell another put option with a lower strike price, such as the 250 exercise BRKb put option on January 21, 2022. This option is currently offered at $ 4.68. So the trader would receive $ 468 for selling this put option, which also expires in about four months.

The maximum risk of this transaction would be equal to the cost of the put spread (plus commissions). In our example, the maximum loss would be ($ 9.30 – $ 4.68) X 100 = $ 462.00 (plus commissions).

This maximum loss of $ 462 could easily be realized if the position is held until expiration and both BRKb put options expire worthless. Both put options will expire worthless if the BRKb share price at expiration is greater than the long put (upper exercise) strike price, which is $ 270 at this point.

The potential profit from this trade is limited to the difference between the strike prices (i.e. ($ 270.00 – $ 250.00) x 100) minus the net cost of the spread (i.e. i.e. $ 462.00) plus commissions.

In our example, the difference between the strike prices is $ 20.00. Therefore, the profit potential is $ 2,000 – $ 462 = $ 1,538.

This transaction would break even at $ 265.38 on the day of expiration (excluding brokerage commissions).