Look at the list of the ten most valuable companies traded on U.S. stock exchanges, and something immediately jumps out. Nine of the companies comprise the business world’s coolest and most exclusive club, glamorous tech firms led by Apple (No. 1) and Nvidia (No. 2), along with Microsoft, Alphabet, and more. And then—there’s Berkshire Hathaway. As they used to sing on Sesame Street, one of these things is not like the others. It’s like seeing a typewriter company on a list of hot IPOs. Who let Berkshire get past the velvet rope? It owns a company called Acme Brick, for heaven’s sake. Its website appears not to have changed materially since about 1998. Its CEO is 94 years old. But it’s market cap sneaked above $1 trillion a few months ago without anyone noticing, and now it sits just beneath Tesla and above Taiwan Semiconductor.
So what gives? The deeper we delve into the bizarre Berkshire anomaly, the more remarkable it seems and the more valuable the explanations become. The company is literally in a class of its own. It isn’t a tech company, but its market cap beats those of all other non-tech companies by such a vast margin that it doesn’t seem to be one of them, either; its runner-up in that group, Walmart, would have to get 41% more valuable just to match Berkshire’s market cap.
Another way to consider the magnitude of Berkshire’s achievement: So far in this tech-infatuated year, Berkshire’s stock has outperformed the shares of Apple, Microsoft, and Alphabet. It has beaten the tech-heavy Nasdaq as well as the S&P, the Dow, and the Russell 2000. It’s hard to remember that CEO Warren Buffett told his shareholders last February, “All in all, we have no possibility of eye-popping performance.”
But then performance can be measured in many ways, and market capitalization isn’t Buffett’s favorite way of evaluating a company. Market cap gauges the market’s expectations, not measurable financial results, and as Buffett often notes, Mr. Market has mood swings. Buffett focuses instead on net worth as calculated by generally accepted accounting principles (GAAP). The concept is simple: Add up a company’s assets and then subtract its liabilities. What’s left is net worth. Apple’s net worth is $57 billion. Nvidia’s is $66 billion. Berkshire’s is $663 billion. Some of the other tech giants have a higher net worth than Apple and Nvidia have, but none reach even half of Berkshire’s. As Buffett also told investors in February, “Berkshire now has—by far—the largest GAAP net worth recorded by any American business.”
Students of Berkshire might object that the company is more of a tech business than it appears to be, since it owns a lot of Apple stock. But the argument doesn’t hold up. Berkshire owns several insurance companies (GEICO is best known) and invests customers’ premiums in huge stock portfolios—and Apple is its largest holding. But Berkshire has been offloading its Apple shares for almost a year, with about 70% of its holdings gone so far. That is, Berkshire stock has been rising as the company gets out of tech, dumping its Apple shares and collecting enormous gains.
Which brings us to the decades-old secret of Berkshire’s breathtaking performance, highlighted by stock market events of the past year. It is, of course, no secret. It’s Buffett, a fiercely independent, scorchingly intelligent CEO. He often seems serenely out of step with the world, as when he sells Apple stock into a rising market. Other business bromides he disdains:
· Everyone knows diversified conglomerates are a terrible idea. Decades of bountiful research have shown they underperform. But in 2015, Buffett told his shareholders, “Berkshire is now a sprawling conglomerate, constantly trying to sprawl further…. If the conglomerate form is used judiciously, it is an ideal structure for maximizing long-term capital growth.” The phrase “used judiciously” is his modest way of saying “used as well as I use it.”
· CEOs don’t scorn their company’s stock. But over the years Buffett has told shareholders when he thinks Berkshire shares are overpriced, and he warns them of potential trouble ahead, as he did again this year. Berkshire is always looking for companies to buy, but it has grown so big, he said, that “there remain only a handful of companies in this country capable of truly moving the needle at Berkshire,” and for various reasons he isn’t interested in buying them. Outside the U.S. “there are essentially no candidates that are meaningful options….” That’s why he said “eye-popping performance” won’t be happening. Yet shareholders didn’t run for the exits. Just the opposite. They trust him to find a way.
· Companies promote the products they sell by using them. Berkshire often does, but not always. It sells directors and officers insurance, which indemnifies board members against personal liability for their actions. But not at Berkshire. “We do not provide [board members] directors and officers liability insurance, a given at almost every other large public company,” Buffett said in his 2011 letter. “If they mess up with your money, they will lose their money as well.”
It seems astounding that Buffett has somehow barged into the technology royals’ jamboree, but it shouldn’t be. He has been so fearlessly unconventional for so many years that very little should surprise us. If it were otherwise, Berkshire stock wouldn’t have increased 4,384,748% under his 60 years of management.
Buffett never ceases to amaze. This is just his latest mind-bender: A 94-year-old CEO joins the tech bros and in some ways outdoes them.
