There's a problem with mutual funds and exchange-traded funds (ETFs) that doesn't bedevil a traditional company. Avoiding this single issue is one of the reasons why Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has achieved such impressive success over time. Here's why this financial giant has produced so many millionaires and why it could keep doing so in the future, even after Wall Street icon Warren Buffett eventually leaves the corner office.
Berkshire Hathaway is similar to a mutual fund
If you were to describe Berkshire Hathaway's business, some might argue that it is an insurance company. But there's a case to be made for calling it a railroad company. And a utility. And a midstream company. And a retailer, a manufacturer, and a chemical company, too. At the end of the day, it would be most appropriate to use the term "conglomerate." That's because it owns businesses across all of the above sectors, and more.
BRK.A Total Return Level data by YCharts.
This is a very unique business. That's the result of Warren Buffett's investment approach . To simplify things, he is looking to buy well-run companies when they are well priced. That's a lot like what you'd expect to hear if you were looking at a value-focused mutual fund or ETF. And given the broadly diversified list of businesses that Berkshire Hathaway owns, it really does appear to have a portfolio of businesses.
If you look at Berkshire Hathaway from this perspective, there's really no good or bad time to buy it. Sure, there are times when the stock is cheaper and times when it is more expensive, but what you are really buying is the investment approach taken by its CEO, Warren Buffett. That approach, meanwhile, has been ingrained into Berkshire Hathaway, given Buffett's long tenure at the top of the company he basically created.
Why Berkshire Hathaway works better than a mutual fund
But there's an important difference between Berkshire Hathaway and a pooled investment vehicle like a mutual fund. A mutual fund is a pass-through entity, so any dividends or capital gains generally get paid out via distributions. As a company, Berkshire Hathaway doesn't have to pass anything through to shareholders. So the cash flows these companies throw off sit on Berkshire Hathaway's balance sheet and give Buffett a cash pile that he can use to invest into more companies. That allows Berkshire Hathaway to grow over time via acquisitions, on top of the growth that is achieved in the businesses it owns.
Right now Buffett doesn't see many opportunities for investment, so the cash pile is growing. At the end of the second quarter, Berkshire Hathaway had $36.8 billion of cash on its balance sheet and another $234.6 billion in short-term investments. That pile is set to grow materially in the third quarter thanks to big sales from the company's equity portfolio , as Buffett has taken profits in Apple (NASDAQ: AAPL) and Bank of America (NYSE: BAC) .
It looks like Buffett may be gearing up for something big. In the company's 2023 annual report, he wrote:
There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can't. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.
That sounds bad. But it is really a time-specific statement. Buffett doesn't see anything needle-moving worth buying right now while the market is hovering near all-time highs. But if there were a bear market , that situation would likely change. The cash he is building up now could be put to good use when valuations fall, giving Berkshire Hathaway more opportunity to create additional millionaires.
You won't get rich quick with Berkshire Hathaway
Here's the thing: Berkshire Hathaway is a long-term investment. Buffett's approach is meant to create increasing wealth over decades. And while he is likely to end his tenure as CEO sooner rather than later, the company he has built should continue to operate in a very similar manner to the way it has operated under his tutelage.
The best time to buy Berkshire Hathaway will probably be during a bear market, which, as it were, will likely be when the company starts investing, too. If you can stomach taking a contrarian approach, however, Berkshire Hathaway could easily help you build a seven-figure portfolio, no matter when you step aboard.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy .
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