When building the core of any portfolio, it is essential to have a diverse collection of great businesses run by superior management. While the list of Top 10 Stocks seeks to achieve those objectives with a collection of fantastic companies to own for the long term, the ninth company on the list can achieve this goal all by itself. That company is Berkshire Hathaway Inc. (NYSE:BRK.A) or (NYSE:BRK.B).
Warren Buffett and Charlie Munger have created a conglomerate that is an ideal alternative to any mutual fund; Berkshire owns a diverse collection of companies in manufacturing, insurance, supply chain, energy, retail, railroad, and a number of other industries. Motley Fool contributor Rich Smith recently published an excellent article with visual illustration of the components of Berkshire’s business that really helps newcomers understand the scope of Berkshire’s operations. Many investors don’t realize just how large some of these business units are; eight of Berkshire’s businesses would qualify for the Fortune 500 if they were standalone companies! In addition to the portfolio of fantastic businesses owned by Berkshire, the company also boasts a portfolio with significant investments in world-class companies like fellow top 10 stocks The Coca-Cola Company (NYSE:KO), American Express Company (NYSE:AXP), Wells Fargo & Company (NYSE:WFC), and International Business Machines Corp. (NYSE:IBM).
While this diverse collection of investments may look a lot like a mutual fund on the surface, there are several reasons that Berkshire has had much better performance than mutual funds over time:
- The management team is unparalleled. While this obviously starts with Buffett and Munger, the more important names to think about for a long term investment today are the talented managers of Berkshire’s business units; Ajit Jain, Greg Abel, Todd Combs, and their peers are poised to continue Berkshire’s success going forward.
- Berkshire embodies the long-term buy and hold philosophy. While the company’s quarterly filing of its changes to its investment portfolio are well-publicized, the fact of the matter is that Berkshire sticks to Buffet’s famous mantra in his 1998 letter to shareholders: “In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” One of many real examples of this is See’s Candy, a business that has been owned by Berkshire for 40 years. In contrast, mutual funds constantly turn over their investments based on short-term motivations.
- The businesses generate synergies. While mutual funds are collections of unconnected companies, Berkshire leverages the differing business models of its companies to make the sum greater than the parts. For example, Berkshire’s insurance businesses have minimal capital requirements and generated a float of $70 billion as of last year. This is a perfect compliment to a capital-intensive business such as Burlington Northern Santa Fe, which plans to increase its capital spending to $4.1 billion in 2013. Berkshire’s ability to leverage its float in its other businesses is a powerful advantage.
- The businesses operate in well-established industries. Berkshire’s holdings may appear “boring” to investors craving multi-bagger returns, but there’s no doubt that these businesses can generate consistent profits. As Buffett has demonstrated for decades, this strategy minimizes the downside risk of questionable business models that may not last, or the potential to overpay for growth.