Berkshire Hathaway: Why Change is Needed

Berkshire Hathaway, led by Warren Buffett since 1965, has traditionally relied on two main drivers of value: a sizable investment portfolio known for its market-beating returns — currently approximately $380 billion — and a collection of wholly owned businesses. Historically, Berkshire’s stock consistently outperformed the S&P 500. However, since around 2008, the S&P has slightly outpaced Berkshire’s stock.

Berkshire Hathaway should officially reduce the significance of its investment portfolio by trimming positions to decrease concentration, accepting the resulting capital gains tax, significantly diversifying the portfolio, and distributing a significant portion of the proceeds to shareholders through buybacks and dividends.

While the concept of Berkshire returning capital through buybacks and introducing dividends isn’t novel, explicitly downplaying the investment portfolio’s significance is a new perspective. It’s the right move for the company.

Though Berkshire’s investment portfolio comprises less than half of its asset base on a mark-to-market basis, it disproportionately influences Berkshire’s overall return. A significant contributor to Berkshire’s recent success has been Warren Buffett’s strategic investment in Apple, yielding approximately $140 billion in unrealized gains since 2018. This represents about half of Berkshire’s stock performance since the Apple investment. Without Apple, Berkshire would have significantly underperformed the S&P. Such outsized success from a single portfolio holding is unlikely to recur.

Warren Buffett’s successors in managing the investment portfolio, Todd Combs and Ted Weschler, each oversee around $17 billion (as of his 2021 letter) but have yet to make any substantial investments. Managing a $380 billion portfolio with high concentration and substantial embedded gains poses a significant challenge, and thus far, it’s unclear how this transition will be managed.

This lack of clarity raises accountability concerns. If a key holding like Apple, representing 50% of the investment portfolio, encounters difficulties, it’s uncertain who will have the authority to make critical decisions.

An accounting change in 2018 brought all unrealized gains and losses in the portfolio directly into Berkshire’s GAAP earnings, subjecting it to increased scrutiny. It is doubtful that the same patience extended to Buffett will be granted to his relatively unknown successors regarding portfolio fluctuations.

With a $380 billion portfolio, Berkshire is among the world’s largest active equity asset managers. Expecting a two-person team to replace Buffett and Munger, considering the size, expectations, and accountability, is unrealistic.

Moreover, Berkshire should no longer be relied upon as the unwavering provider of liquidity it once was during crises. In 2008, Warren Buffett sold significant portions of holdings in Johnson & Johnson, Procter & Gamble, and ConocoPhillips to purchase billions in fixed-income securities with equity potential issued by Wrigley, Goldman Sachs, and General Electric. Additionally, he wrote $40 billion worth of puts and credit default swaps. Buffett’s two-man successor team should not be expected to engage in such tactical positioning to the same extent.

Portfolio Transformation, Operational Focus

The prudent action for Berkshire is to divest its concentrated positions, diversify, settle the capital gains tax, and return a substantial portion of the proceeds to shareholders. This would result in a smaller and more diversified portfolio, significantly reducing portfolio risk and decision-making uncertainty for Buffett’s two-person succession team. Berkshire should go further and aim to continue diversifying its holdings and even explore direct indexing strategies.

In a sense, this operational shift has already begun. The investment portfolio once held a more prominent position within Berkshire’s asset base. However, a pivotal moment occurred after Berkshire acquired BNSF in 2009, marking the beginning of its transition from primarily an investment manager fueled by the large float from its insurance subsidiaries to a full-fledged conglomerate.

Since then, Berkshire has consistently reinvested substantial resources into its diverse portfolio of subsidiaries, further solidifying its conglomerate status.

Downplaying the investment portfolio will also enable Berkshire to concentrate on what matters most: addressing the challenges within its wholly owned subsidiaries. Below, Buffett hints at some of the difficulties faced by his subsidiaries. Note the change in wording from “a few that are marginal” to “a large group that are marginal.”

Berkshire Hathaway 2021 10-k Annual Letter:

“I make many mistakes. Consequently, our extensive collection of businesses includes some enterprises that have truly extraordinary economics, many others that enjoy good economic characteristics, and a few that are marginal. One advantage of our common-stock segment is that – on occasion – it becomes easy to buy pieces of wonderful businesses at wonderful prices. That shooting-fish-in-a-barrel experience is very rare in negotiated transactions and never occurs en masse. It is also far easier to exit from a mistake when it has been made in the marketable arena.”

Berkshire Hathaway 2022 10-k Annual Letter:

“Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon ‘creative destruction.’”


Reducing the emphasis on the investment portfolio will be a significant challenge, given its historical importance as Berkshire’s secret ingredient. However, as Berkshire Hathaway enters its next phase, it is essential to address the risks to its business model. Entrusting a $380 billion concentrated equity portfolio to a two-person team and hoping for a favorable outcome presents a significant and unaddressed risk, especially following the passing of Warren Buffett’s longtime partner, Charlie Munger. Today, it is imperative for Berkshire to take concrete and actionable steps to mitigate this risk and ensure the company’s sustained success.


Deiya Pernas, CFA, Co-Founder of Pernas Research, began his career as an analyst at Morgan Stanley before becoming a founding member of The Bahnsen Group. As Deputy Chief Investment Officer, he played a pivotal role in growing assets from $500 million to over $3.5 billion. In 2022, he founded Pernas Research, aiming to provide insightful, transparent, and performance-driven equity research for investors.

© 2024 Newsmax Finance. All rights reserved.

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