Warren Buffett turns 91, preparing Berkshire Hathaway for a new economy

Before turning 91 on Monday, Warren Buffett has been taking steps to make sure Berkshire Hathaway – and its eventual successor – are better positioned to benefit from a technology-driven economy.

The conglomerate’s operating business is a set of companies focused on the traditional backbone of the economy, from railroads to batteries, insurance, home furnishings and retail. Due to the old orientation towards the economy, Berkshire has lost the explosive growth seen in the amazons of the world over the years. But the “Oracle of Omaha” shows its openness to investments that move away from the old core of Berkshire’s economy to adapt to the new world.

Berkshire’s exposure to technology stocks has grown to 45% of its portfolio thanks to its massive stake in Apple, according to InsiderScore.com. Its investment from Apple, first bought in 2016, has risen to more than $ 120 billion to become its largest stake. Ten years ago, Berkshire’s major equity stakes showed very little technology exposure than IBM.

To bet on growth, Berkshire has immersed itself in initial public offerings and pre-IPO investments, which the legendary investor once mocked. It is widely speculated that Buffett’s investment lieutenants Todd Combs and Ted Weschler orchestrated these bets that break the Berkshire tradition.

“There’s been a pretty significant shift in the investment portfolio. It’s now really geared towards the new economy,” said James Shanahan, a Berkshire analyst at Edward Jones. “It has given Todd Combs and Ted Weschler a lot more flexibility and opportunity to get their fingerprints in the business.”

Berkshire invested in Brazilian fintech technology StoneCo a few days after its IPO in 2018, and its stake has grown to more than $ 700 million thanks to the doubling of the share price since its debut in the market. During that year, Berkshire also bought a stake in India’s largest digital payments start-up, Paytm, which has applied for a IPO.

In the third quarter of 2020, the conglomerate bought snowflake shares worth $ 250 million at the IPO and an additional 4.04 million shares of another shareholder at the starting price. In June 2021, Berkshire made a pre-IPO investment of $ 500 million in the parent company of Nubank, a digital bank based in Brazil.

Buffett, the man who pioneered investment in purchasing and maintenance, had spoken out about his discomfort with buying companies around his market debut. Earlier, Buffett compared buying IPOs to attempts to win lotteries, arguing that they are not a solid foundation for an investment. The last major IPO that Buffett bought before the recent parade was his 1956 Ford debut.

“The current equity portfolio is more dynamic than it was 10 or 15 years ago with the Todds at the helm,” said Cathy Seifert, a Berkshire analyst at CFRA Research. “They’re definitely going to put their feet in the water and bite into some new economy stocks. Unless you have some exposure to that, it’s hard to generate alpha, especially because of the value-oriented bias they usually have.”

Despite increasing its technology exposure by close to 45%, Berkshire recently dropped some of its major financial bets, including JPMorgan Chase, Wells Fargo and PNC Financial. The conglomerate still holds significant stakes in American Express and Bank of America in late June.

For Buffett’s resilient observers, they’ve been asking the same question year after year: when will he end up with that “elephant-sized” acquisition? The answer may be disappointing to many, given their disciplined value judgment.

“I think what keeps him from doing anything too aggressive is that he almost doesn’t want to have the last deal he makes, which will be remembered, that it’s a disaster,” Berkshire analyst Greggory Warren told Morningstar. “He doesn’t want to obstruct the next guy who leads the program by acquiring something that might not help him.”

At the end of June, Berkshire’s cash stack stood at $ 144 billion, still nearly a record despite the company’s massive repurchase program.

For decades, companies used to throw themselves at Buffett, who was one of the biggest whales with the most money, along with privately held companies. Unlike leveraged purchases with fast turnovers, Berkshire has always been a more permanent buyer that also gives companies the autonomy to run their business.

However, private equity has been ravaged in recent years with record interest rates at record lows, and companies are also in favor of a flood of new buyers of special-purpose acquisition companies with possibly more attractive offers. to make itself public.

Market valuations are close to pre-bubble levels as of the 2000s. In particular, the utility and transmission segment in which Berkshire wants to be a consolidator has become very expensive, as these stocks are they became the preferred names for yield-hungry investors, according to Morningstar’s Warren.

“The fact that Berkshire hasn’t made a blockbuster deal, I don’t think investors will keep it,” Seifert said. “I think they still rely on their judgment and insight, particularly given where the ratings are now.”

Instead of doing business, Berkshire has focused on returning capital to shareholders. The company repurchased $ 6 billion of its own shares in the second quarter, bringing the total for six months to $ 12.6 billion. Berkshire bought a record $ 24.7 billion last year.

“It’s been a long time,” Warren said. “The only alternative for them if they don’t want the cash balance to continue to grow is to keep buying stocks. This is probably the best option for short-term excess cash until we have a correction in the market.”

Thanks, in part, to the repurchase of shares, Berkshire’s Class B shares have quickly eliminated the damage caused by the pandemic and regained its all-time high. Shares have risen by around 23% in 2021.

Buffett started a repurchase program in 2011 and has long preferred to buy shares and companies from other companies. At the 1999 annual meeting, Buffett said he would not buy Berkshire shares unless they had a “rather dramatic undervaluation.”

In 2018, the company’s board announced the removal of its repurchase limit to allow the purchase as long as it believes the price “is below Berkshire’s intrinsic value”.

“I think he’s doing a good job navigating and returning capital to shareholders. He understands that his legacy will be valued not only by what he did the first 50 years, but by what he did the last five he was in charge of,” he said. Warren. .