Since taken over by
Warren Buffett in 1964, Berkshire Hathaway (BRK) has made investment gain of a
total of 1,826,163% for anyone who
holds its stock in the last 50 years (until 2014). This means that if you buy
BRK for US$ 1,000 in 1964 and still holding it until the end of 2014, then by
ignoring the factor of inflation, your investment is now worth.. US$ 18.3 million.
Although the numbers look
fantastic, but do not forget that you need to wait for 50 years to earned such
fortune. But that’s not what we’ll discuss in here. In this article, we will focus
on the fact that although the stock of BRK tend to rise steadily in the
loooooong term, but it could also decline in a given year, usually because the
company posted financial performance that is not as good as the year before,
whether because of decline in net earnings or net equity. Warren himself states
that in the last 50 years, Berkshire stock had three times plummeted by more
than 50%. Thus, although in the long term BRK shares will eventually continue
to rise, but at certain times, some people may instead suffer huge losses from
their investment in Berkshire.
More specifically, the
following is the data of the percentage growth of net assets/equity of BRK,
compared with the percentage of increase or decrease in the price of its shares
each year, from 1964 to 2014. Data in percent:
| Year | Equity Value | Market Value | ‘Value Gap’ |
| 1965 | 23.8 | 49.5 | (25.7) |
| 1966 | 20.3 | (3.4) | 23.7 |
| 1967 | 11.0 | 13.3 | (2.3) |
| 1968 | 19.0 | 77.8 | (58.8) |
| 1969 | 16.2 | 19.4 | (3.2) |
| 1970 | 12.0 | (4.6) | 16.6 |
| 1971 | 16.4 | 80.5 | (64.1) |
| 1972 | 21.7 | 8.1 | 13.6 |
| 1973 | 4.7 | (2.5) | 7.2 |
| 1974 | 5.5 | (48.7) | 54.2 |
| 1975 | 21.9 | 2.5 | 19.4 |
| 1976 | 59.3 | 129.3 | (70.0) |
| 1977 | 31.9 | 46.8 | (14.9) |
| 1978 | 24.0 | 14.5 | 9.5 |
| 1979 | 35.7 | 102.5 | (66.8) |
| 1980 | 19.3 | 32.8 | (13.5) |
| 1981 | 31.4 | 31.8 | (0.4) |
| 1982 | 40.0 | 38.4 | 1.6 |
| 1983 | 32.3 | 69.0 | (36.7) |
| 1984 | 13.6 | (2.7) | 16.3 |
| 1985 | 48.2 | 93.7 | (45.5) |
| 1986 | 26.1 | 14.2 | 11.9 |
| 1987 | 19.5 | 4.6 | 14.9 |
| 1988 | 20.1 | 59.3 | (39.2) |
| 1989 | 44.4 | 84.6 | (40.2) |
| 1990 | 7.4 | (23.1) | 30.5 |
| 1991 | 39.6 | 35.6 | 4.0 |
| 1992 | 20.3 | 29.8 | (9.5) |
| 1993 | 14.3 | 38.9 | (24.6) |
| 1994 | 13.9 | 25.0 | (11.1) |
| 1995 | 43.1 | 57.4 | (14.3) |
| 1996 | 31.8 | 6.2 | 25.6 |
| 1997 | 34.1 | 34.9 | (0.8) |
| 1998 | 48.3 | 52.2 | (3.9) |
| 1999 | 0.5 | (19.9) | 20.4 |
| 2000 | 6.5 | 26.6 | (20.1) |
| 2001 | (6.2) | 6.5 | (12.7) |
| 2002 | 10.0 | (3.8) | 13.8 |
| 2003 | 21.0 | 15.8 | 5.2 |
| 2004 | 10.5 | 4.3 | 6.2 |
| 2005 | 6.4 | 0.8 | 5.6 |
| 2006 | 18.4 | 24.1 | (5.7) |
| 2007 | 11.0 | 28.7 | (17.7) |
| 2008 | (9.6) | (31.8) | 22.2 |
| 2009 | 19.8 | 2.7 | 17.1 |
| 2010 | 13.0 | 21.4 | (8.4) |
| 2011 | 4.6 | (4.7) | 9.3 |
| 2012 | 14.4 | 16.8 | (2.4) |
| 2013 | 18.2 | 32.7 | (14.5) |
| 2014 | 8.3 | 27.0 | (18.7) |
| Average | 19.4 | 21.6 | (2.2) |
Now, before we discuss
the long table above, I will explain first, what is meant by the value gap (please read this section carefully!). If you googling the internet,
there are several explanations about the value gap, but value gap here is the
difference between the percentage of increase/decrease in the value of net
assets/equity of Berkshire, or in other words the real value of the company, with the percentage of increase/decrease
in the price/market value of the shares. If the number is negative in a given
year, meaning that during the year, Berkshire stock price rose higher than the
equity value of the company. And if the number is positive in a given year, it
means the opposite, Berkshire's equity value rises higher than its stock price.
So if someone wanted to
invest for the long term in Berkshire, he should buy the shares at the end of a
particular year where the value gap in that year was positive.
For example, in the
above table, the highest figure of value gap highest was recorded in 1974, ie
54.2%, since the price of Berkshire stock for the year fell 48.7% (in that
year, the Wall-Street was hit by a crash, related to an oil crisis in the
Middle East), whereas the net asset value of the company actually still grew by
5.5%. If someone was bold enough to buy shares of Berkshire at the end of 1974
(‘bold’ here is the right term, because at the time the Wall Street were
destroyed for two years in a row), then at the end of 1976, or only two years
later, he would make extraordinary profit as the shares of Berkshire climbed a
total of almost 150 percent!
Stock Prices Fall = Rare
Opportunity!
The column of value gap
above showed more negative numbers than the positive ones. And it explains that
you can only buy Berkshire in certain years where the price has been fall
(usually because of a market correction), say like in 1974, once again if the
goal is for long-term investment.
Another example, in
2008, the S&P 500 dropped 37.0% because of the subprime mortgage crisis,
and even the equity value of Berkshire also down 9.6% over the previous year (over
the last 50 years, Berkshire's equity dropped only two times, ie in 2001 and
2008). But because Berkshire's stock price fell more deeply, its value gap
become positive. And here’s the fact: When the crisis finally ended, in later
years Berkshire managed to keep its equity growing, and its stock price also
continue to rise almost every year (only dropped once in 2011).
In conclusion, as long
as you choose the stock of a good
company (there is a lot of criteria to say that a company is a good one),
the decline in its stock price in a given year, either because the market
correction/crash or because the poor performance of the company, is always a
chance, as long as you commit to hold the stock in the long term (1 year or
more).
Part two of this
article can be read here.
Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com.
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