Warren Buffett’s holding company, Berkshire Hathaway, has been a lucrative investment for many over the years. The company’s stock has returned over 239,000% since 1980, turning $100 into $240,000. Berkshire Hathaway is now one of the world’s largest corporations, worth about $1 trillion.
This means investors need to be aware of the price they pay for the stock, as overpaying could limit returns if a high valuation doesn’t hold up. When valuing Berkshire Hathaway, book value is often considered the best metric to track how the company is creating shareholder value. This is because Berkshire owns many individual companies and stakes in publicly traded firms, making bottom-line earnings less meaningful.
Currently, Berkshire stock trades at 1.58 times book value, a 13% premium compared to its 10-year average of 1.4 times book value. This relatively high valuation poses a risk, as high valuations can snap back during market downturns.
berkshire’s valuation and future risks
While the hefty premium makes it hard to call Berkshire a buy today, the company’s financial flexibility is noteworthy. Buffett has amassed $325 billion in cash and short-term investments, providing ample opportunity for value-creating moves. Matt Frankel, a Certified Financial Planner®, and contributor Tyler Crowe recently discussed whether Berkshire Hathaway could still be a solid investment at its current valuation.
They noted that while the company has historically outperformed the market, its recent valuation surge may limit its ability to do so in the near future. Investors considering Berkshire Hathaway before 2025 should weigh current market dynamics against the company’s established strengths. While past performance has been impressive, future returns may be more modest.
The impact of leadership transitions must also be considered, as Warren Buffett and Charlie Munger are advancing in age, and their successors will need to continue the legacy. In conclusion, while Berkshire Hathaway’s entry into the trillion-dollar market cap club is a testament to its historical success, potential investors should carefully analyze whether the current valuation still offers the prospect of strong future returns.
