Dilly Bar numbers

$1,000 invested in Berkshire Hathaway: Had you invested $1,000 in Berkshire Hathaway 51 years ago, you’d have $15.3 million today. That’s a lotta Dilly Bars — 10,200,000, to be exact. Why the Dilly Bar comparison? They’re Warren Buffett’s favorite treat — yours for $1.50 each.

$1,000 invested in S&P 500: If you’d invested $1,000 in the S&P 500 index 51 years ago, you’d have $112,341 today — good for 74,894 Dilly Bars.


One of the easiest ways to get rich in the past 51 years, longtime Berkshire Hathaway shareholders say, has been to leave it to Warren.

As in Buffett, chairman and chief executive of the Omaha-based conglomerate, who has led the company to beat the Standard & Poor’s 500 stock index on a compound basis over that period by almost 2-to-1.

But will it still be true in another 51 years? (Buffett is 85.) Or even in five more years, as the company’s enviable returns become harder and harder to replicate?

As for the historical numbers, they tell the tale of wealth that starts dynasties:

» Berkshire’s book value — Buffett’s preferred benchmark — has compounded by 19 percent over the 51 years since Buffett bought a struggling Massachusetts textile mill and began doing business as head man at a publicly traded company that later branched into insurance, retailing, heavy industry and most everything else related to mankind’s needs and wants.

» As for the share price, it has compounded annually at 21 percent over the 51 years.

» Over the same time period, the Standard & Poor’s 500 index had an annual compound gain of about 10 percent, dividends included.

» In dollar terms, $1,000 put with Berkshire Hathaway 51 years ago is now worth $15.3 million. The same amount invested in the S&P 500 would be worth $112,341. (Values were calculated using the compounded annual gain of 20.8 percent from 1965-2015 for per-share market value of Berkshire, and the compounded annual gain of 9.7 percent from 1965-2015 in the S&P 500, with dividends included.)

David Kass, a Berkshire shareholder, researcher and business professor at the University of Maryland, says that from 1965 through 1998, Berkshire’s book value compounded at an average annual rate of 25 percent, versus 13 percent for the S&P 500, dividends included.

The growth rate, however, dimmed to 9 percent from 1999 through 2015, versus 7 percent for the S&P 500, with dividends included. Worse, between 2009 and 2015, Berkshire has underperformed the S&P 500, with an average annual compounded return of 12 percent versus 15 percent for the index.

Has Buffett lost his touch? Is there some toxic flaw deep in the inner workings at Berkshire?

Not really. If anything, Berkshire supporters say, the company is simply a victim of its own size, and expectations should naturally change.

“The greatest limiting factor to Berkshire’s rate of growth in per-share book value is its increasing size,” Kass said. “With total assets of $552 billion at year-end 2015, and ranked fifth in market capitalization in the S&P 500, it is becoming increasingly difficult to move the needle.”

The company’s market capitalization, or shares outstanding multiplied by the share price, is telling: Berkshire’s market capitalization has increased by almost $300 billion — the gross domestic product of Israel — in the past 20 years. What was about $40 billion of market cap in 1996 is now about $350 billion.

“Size is the most important factor that will affect Berkshire’s ability to replicate gains in intrinsic value over the next several decades,” said Ted Bridges, principal at Omaha’s Bridges Investment Management, which owns Berkshire shares among its $1.8 billion of assets under supervision.

Buffett, Bridges says, repeatedly called for caution in annual reports over the years, insisting that 20 percent annual gains are unsustainable and that shareholders should expect gains closer to 10 percent.

“Future gains will be harder to achieve because the base has become so large, and the pool of acquisition candidates among both public and private companies that move the needle is far smaller,” Bridges said.

Berkshire’s recent purchases of whole companies — now more important by far than the portfolio of shares in other publicly traded companies such as Coca-Cola and Wells Fargo — are informative. Last year, Berkshire made its biggest purchase ever, that of Oregon-based Precision Castparts, a maker of aerospace components found in almost every airplane in the world. (Past whole-company purchases include BNSF Railway, chemical maker Lubrizol and Dilly Bar purveyor Dairy Queen.)

Buffett spent about $37 billion for Precision Castparts, when including assumed debt. That purchase, made mostly in cash, was almost 100 times what Berkshire earned in total corporate operating earnings 25 years ago.

“I don’t see Berkshire growing at the same pace as in the past,” said Russ Kaplan, a Berkshire shareholder and principal of Omaha wealth adviser Russ Kaplan Investments. “The major reason is its huge size, which makes percentage gains harder.”

George Morgan, a business instructor at the University of Nebraska at Omaha and Buffett researcher, says there is another damper on book value increases at Berkshire that few people take into account: the shrinking role of shares in other publicly traded companies.

In years past, Morgan said, Berkshire’s main activity was Buffett’s stock-picking. Over the years, he built up a portfolio of blue-chips such as American Express and IBM at prices he considered to be below their true value — the basis of his value investing style learned from stock-market guru Benjamin Graham at Columbia University in the early 1950s.

Berkshire’s stocks had a market value at the end of 2015 of $112 billion, or only 20 percent of the company’s total assets of $552 billion.

But 20 years ago, the portfolio of marketable securities at market value accounted for almost two-thirds of total assets — $28 billion of securities on total assets of $43 billion.

Why is this important in understanding how it is harder for Berkshire to push up book value?

“In the early years, much of Berkshire’s assets were in publicly traded companies and there were times when the holdings were priced at a premium, which artificially pushed up Berkshire’s book value,” Morgan said. “That is not the case today because most of the assets are in wholly owned companies.”

In other words, Morgan said, the shares in other companies Berkshire owns no longer boost book value as before.

There is, however, a Berkshire premium when it comes to whole acquisitions, argues Jerry Pettit, an Omaha investment adviser whose Pettit Funds follows a value-investing approach, a standing in the business world that will continue to keep valuable privately held companies such as Ben Bridge Jewelers and Nebraska Furniture Mart eagerly saying yes to Berkshire when it comes time to find a permanent home.

“As a True Believer, I do believe that Berkshire will continue to outperform the market, particularly while Buffett maintains a hands-on and active role in its investment selections,” Pettit said. “Its stellar reputation should continue to earn it opportunities to be given offers to buy companies at attractive prices that other less-reputable companies are less likely to receive.”

Berkshire Hathaway Inc. owns the Omaha World-Herald.

Contact the writer: 402-444-3197, russell.hubbard@owh.com

* * * * *

Berkshire Hathaway shareholders meeting: Schedule of events

*Credentials required

FRIDAY

*Noon-5 p.m.: Shareholder shopping, CenturyLink Center

11 a.m.-6 p.m.: Shareholder service kiosk

SATURDAY

*Annual meeting, CenturyLink Center

7 a.m.: Doors open

7 a.m.-4:30 p.m.: Shareholder service kiosk

7:15 a.m.: Sign up to challenge Warren Buffett’s newspaper-tossing skill

7:45 a.m.: Buffett tosses papers, tours exhibit hall

8:30 a.m.: Company movie

9:30 a.m.: Q&A session with Buffett and Charlie Munger

Noon: Lunch break

1 p.m.: Q&A resumes

3:30 p.m.: Short recess

3:45 p.m.: Formal business meeting

4:15 p.m.: Meeting adjourns

4:30 p.m.: Exhibit booths close

5:30 p.m.-8 p.m.: Nebraska Furniture Mart cookout

SUNDAY

8 a.m.: Berkshire Hathaway “Invest in Yourself” 5K; registration closes at 9:59 p.m. CST today at www.investinyourself5k.com.

9 a.m.: *Borsheims shopping day; 1 p.m. brunch

1 p.m.-10 p.m.: *Gorat’s Steakhouse, private shareholder dinner, pre-reserved

OTHER EVENTS

» University of Nebraska at Omaha College of Business Administration

(Advance registration and payment required)

Genius of Warren Buffett course, Monday-Wednesday

Philanthropy Summit, Thursday (benefits Girls Inc.)

Value Investor Conference, Thursday-Friday

» GuruFocus Value Conference, Doubletree Hotel, Thursday-Friday

» CFA Society of Nebraska value investing dinner, 5:45 p.m. Thursday, Omaha Marriott. Speakers: Steven Lipper, principal and portfolio manager, and Steven McBoyle, portfolio manager for Royce & Associates on small-cap investing.

» Free Value Investing conference with book signing, reception and panel discussion, 3 p.m.-5 p.m. Friday at Creighton University’s Heider College of Business Administration, 602 N. 20th St. Panelists are Pat Brennan, Lawrence Cunningham, Tom Digenan, Bruce Greenwald, Peter Heckmann, Robert Johnson and John Maginn.

*SHOPPING DISCOUNT PERIODS

Borsheims: Monday through May 7

Nebraska Furniture Mart: Tuesday through May 2

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