Don't get me wrong --Wells Fargo is one of the best-run banks in the world and still has strong potential for growth. The bank is more profitable than the rest of the big four and has done a much better job of managing risk. However, Warren Buffett's Berkshire Hathaway is arguably the best stock to buy for the long run, and would make a smart addition to anyone's long-term portfolio.
Continue Reading Below
It's like buying 61 companies in one
Berkshire's primary business is insurance, which it conducts through wholly owned subsidiaries such as Geico, General Re, and others. However, there's a lot more to Berkshire than its insurance operations. Over the years, Warren Buffett and his team have built up a diverse collection of businesses, many of which are household names. For example, these are all Berkshire companies:
- BNSF Railroad
- Business Wire
- Clayton Homes
- Fruit of the Loom
- Pampered Chef
In addition to the fact that these are all great businesses, Berkshire's collection of subsidiaries gives it several competitive advantages. An obvious advantage is diversification -- just because one or two of Berkshire's businesses experience tough times doesn't mean the others will be in the same predicament. Plus, many of Berkshire's businesses are recession-resistant. If the economy were to fall into recession, businesses like Pampered Chef would likely see revenue drop. However, businesses like Geico and Berkshire Hathaway Energy would do just fine.
Another advantage is financial flexibility. Since these businesses are part of the same company, Berkshire can choose to use their profits wherever they're needed. For example, if Duracell produces a higher profit than it needs to reinvest in its business, Berkshire can choose to use the money to help expand NetJets. Or, it can set profits from its businesses aside for future acquisitions or stock purchases. Buffett likes to have an 11-figure cash reserve at all times, and these subsidiaries create 61 sources that can potentially fuel this stockpile.
Continue Reading Below
Don't forget about that stock portfolio
In addition to all of Berkshire's subsidiaries, shareholders also benefit from Berkshire's stock portfolio which has historically produced strong results. As of this writing, Berkshire owns 45 stocks, many of which read like a Who's Who of great American companies. Some of Berkshire's stock holdings include:
- American Express
- Costco Wholesale
- Deere & Company
- General Motors
- Kraft Heinz
- Phillips 66
- U.S. Bancorp
- Wal-Mart Stores
And last but not least, one of Berkshire's largest stock positions is Warren Buffett's favorite bank:Wells Fargo. Berkshire has been building a position in Wells Fargo for some time now, beginning with a $290 million investment in 1990. Now, Berkshire owns a stake in the bank worth $24.5 billion as of the company's latest SEC filings. In fact, the value of Berkshire's Wells Fargo stock makes up more than 7% of its total market cap as of this writing.
In his latest letter to Berkshire shareholders, Buffett emphasized that the company's willingness to invest large amounts of money in non-controlling stakes (like Wells Fargo) is a big advantage over peers. Not only does this broaden the company's potential investment pool from the companies it can buy in full to include any publicly traded stocks, but it also gives Berkshire more liquid assets that it could sell quickly if necessary. For example, if a massive and lucrative acquisition opportunity came up, Berkshire has more than $100 billion worth of stock it could potentially sell to finance it.
A great base for any long-term portfolio
My point is that if you're building a long-term stock portfolio, an investment in Berkshire can get you into a diverse assortment of great businesses and stocks with a single investment. And with Warren Buffett and his expert stock-pickers making the company's investment decisions, the company should continue to produce market-beating performance for decades to come. For these reasons, I feel that Berkshire Hathaway is a great foundation on which to build your portfolio.
The article Why Long-Term Investors Should Prefer Berkshire Hathaway Over Wells Fargo originally appeared on Fool.com.
Matthew Frankel owns shares of American Express, Apple, Berkshire Hathaway (B shares), and General Motors. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Coca-Cola, Costco Wholesale, and Wells Fargo. The Motley Fool is short Deere & Company and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends American Express and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.