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Why Investors Prefer Berkshire Hathaway over the S&P 500

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Equity investment

As of February 2016, Berkshire Hathaway’s (BRK-B) stock has risen by 9% in the past month after falling by 5% in the past year. In comparison, the S&P 500 (IVV) has risen by 7% and has fallen by 4% in the same periods.

Historically, Berkshire has delivered performance at par with or above the index. In 1Q16, the company is expected to report earnings per share of $3,130 backed by diversified holdings across services, manufacturing, power stations, and railroads. However, it’s expected to see lower reinsurance income on subdued investment income.

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The company’s operations can be classified as a combination of active asset management and conglomerate management. Because it doesn’t raise capital directly from markets or launch funds or financial products under its parent company structure, the only way to participate in Warren Buffett’s investments is by purchasing Berkshire Hathaway equity. The company competes with asset managers Blackstone (BX) and BlackRock (BLK) for the purchase of quality assets.

Berkshire’s long track record of outperformance, combined with a highly risk-averse approach toward investments, has enabled it to command a premium over its peers and the overall market.

Improved valuations

On a one-year forward price-to-earnings basis, Berkshire Hathaway is trading at 17.1x. By comparison, its peers are trading at an average of 12.8x. Berkshire Hathaway has commanded a premium over the years because of its ability to redeploy excess capital from its subsidiaries toward better opportunities. These opportunities include better-performing subsidiaries and successful minority investment bets made by Buffett.

As of December 31, 2015, Berkshire Hathaway’s equity portfolio was valued at $132 billion, compared to $110 billion in the previous quarter. The equities revived marginally after falling steeply in 3Q15. In the current quarter, Berkshire’s portfolio valuations have fallen. Three of the company’s top five major holdings have fallen. American Express (AXP), Wells Fargo (WFC), and IBM (IBM) fell 27%, 10%, and 14%, respectively.

Berkshire Hathaway could trade at around 17x–19x as it continues to expand on profitable bets led by Buffett.

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