Background of Berkshire Hathaway Inc:
Berkshire Hathaway Inc (Berkshire) is a holding company that is engaged in a number of business activities that include Insurance, Utilities and Energy, as well as other Manufacturing Servicing and Retailing activities. A recent acquisition of a a 4.4$ billion take over of U.S chewing gum company Wrigley with a deal made with Mars chocolate company proves how well the company diversifies its business activities in different lines successfully.
Berkshire Hathaway Inc, was originally incporporated as Berkshire Manufacturing Company back in 1889 in the state of Massachussets.
In 1929, other textile manufacturers such as Valley falls Company,Greylock Mills and Fort Drummer Mills merged into the coporation which was then known as Berkshire Fine spinning Associates and they accounted for over 20% of the fine cotton textile production in the United States of America.
In 1965, after years of poor perfomance due to factors that included the great depression in the 1930s, a major change occurred in the company?s management when a partnership led by the investor Warren Buffet after several disputes with the Stanton Family, purchased enough stock to control the Berkshire Company.The company?s operations were then moved to Omaha, Nebraska where Warren Buffet was based.
In 1967, the company entered the insurance segment, acquiring National Indemnity and National Fire and Marine Insurance Company for a sum of 8.5$ million dollars and in 1968, made a significant move in taking over Sun Newspapers.Warren Buffet in 1969, became the chairman of Berkshire Hathaway Inc.
In the years to come, several related businesses were acquired such as Cypress Insurance Company and in the newspaper business,Buffalo Evening News which was purchased through Blue Chip Stamps.
Through several successful acquisitions , Berkshire Hathaway Inc quickly grew to be one of the most successful companies with impressive strategic plans by Warren Buffet who is currently the second richest man in the world. ( After bill gates).
In december of 2008, Berkshire Hathaway class A shares were sold for a record 96000$.This resulted in the shares being the highest-priced shares on the New York Stock Exhange. This was partly due to the fact that the company never had a stock split or ever paid a dividend, retaining a balance sheet that is ideal for investors.
Even though the company is one of the most succesful corporations, the Berkshire Hathaway Inc shares are not included in broad stock markets such as the S&P 500 (Standard and Poor?s)
The annual shareholders meetings held every year are attended by over 20 000 people.The 2007 annual shareholders meeting was attended by over 25000 people.
The main competitiors for Berkshire Hathaway Inc include :
- The Blackstone Group LP
- HM capital Partners LLC
- KKR & Co.LP
Description and Analysis of Berkshire Hathway Inc over time:
According to Berkshire Hathway Inc, the best fiscal year was in 1976, where 59.3% was the highest return the company earned in over 44 years.
The Book value of Berkshire Hathaway grew from 19$ to 70530$ ( compounded annualy ).However, in the fiscal year 2007-2008, they fell drastically.
The worst fiscal year was 2008 which resulted in a -9.6% return. This was based on the figures of both Berkshire Hathaway Inc and the S & P 500 which may be accounted to the financial crisis of 2008.
In 2008, the decrease in the net worth of the company was 11.5$ billion dollars.
The book value of the Class A and Class B shares reduced by over 9.6%
However, the company's annual gain figures since 1965 is at an impressive 20.47% and an overall gain at a remarkable 362498.60%.
The Average Return ( Mean return ) of Berkshire Hathaway Inc which is calculated as a simple mathematical average of a series of returns generated over a period of time, in the past 44 years stood at 21.35 %.
From The above figure, we can conclude that the curve is right- tailed which implies that the skewness is positive.
Berkshire Hathway Inc Vs. S & P 500
There have been many discrepancies in the figures stated by Berkshire Hathaway Inc and those stated by the S & P 500 which are mentioned below in context to the relevant financial categories:
Overall gain: Of Berkshire Hathaway Inc is stated at 362489.60% whereas the figures based on the S & P 500 are only at 4236.04%
Annual Gain : as stated by Berkshire Hathaway Inc is at 20.47% while the figures by S&P 500 stand at a mere 8.9%.
Mean (Average Return) : according to Berkshire Hathway is at an impressive 21.35% while the figures by S&P 500 are just at 10.51%.
Standard Deviation: which is also used to calculate the diversification of risk of a portfolio. If the standard deviation is less, the variation is less which also means the risk is less. (the closer the standard deviation is to the mean, the risk also may be interpreted as lesser).
14.88% was the Standard Deviation calculated according to the figures stated by Berkshire Hathaway Inc while the Standard Deviation calculated based on the figures of S&P 500 were at 17.98% which concludes as the risk lever is higher according to S&P 500.
A t-Test is a financial calculation used to evaluate a company?s perfomance in regard to wether it ( the company) has over / under performed.The t-Test compares t-Stat with the t-Critical.
If the t-stats is greater than the t-critical, H1 is considered.That is in this context based on the figures available, Berkshire outperformed S&P 500 historically, as well as outperformed S&P 500 for more than 5% growth annualy.
However, in regard to wether Berkshire Hathaway Inc outperformed S&P500 for more than 10% annualy, t-critical is greater than t-stats which means we consider H0 and not H1.That is, Berkshire Hathaway Inc did not outperform S&P 500 in this case.
According to Berkshire Hathway Inc, the best performance year was in 1976 while the S&P 500 figures show the best performance to be in 1995.However, the worst performance year according to both Berkshire Hathaway Inc and S&P 500 are in 2008.
The best returns according to Berkshire Hathaway Inc are calculated at 59.3% while the best return by S&P 500 is at 37.5%.
In regard to the worst return, Berkshire Hathaway Inc is at -9.6% while the S&P 500 shows it at -37%.
Berkshire Hathaway Inc performance through CAPM:
Capital Asset Pricing Model is defined as the relationship between risk and expected return, which in turn is used in the pricing of risky securities.
The general concept of CAPM is that the investors are compensated in two ways: Time value of money and Risk. CAPM can be calculated using the following formula:
In regard to investment, there are two types of securities available in the market: Risk Free Securities or Risky Securities
A company portfolio should always consider keeping an efficient balance between investing in a Risk Free or a Risky Security.
CAPM ( capital asset pricing model ) is used to calculate the expected returns which depend on a security?s sensitivity in the market( which is measured by Beta).
Higher the Beta- Higher the risk which also means higher the return The foremost principle of investment states that high risk leads to high returns.
CAPM is also used to find out the pricing of a risky security in a market.
In measuring the risk for Berkshire Hathaway Inc, if p<0.05, then alpha and beta are considered to be significant. ( x-variable calculated is the Beta and Alpha is calculated as the intercept).
Lesser the Beta value, lesser is the risk of the asset.
The figures calculated for Berkshire Hathaway Inc are as follows:
Alpha = 0.009084834
P for Alpha= 0.013061156
P for Beta= 2.48179e-130
Since the p value is less than 0.05, it is considered significant in both the case of Alpha and Beta.
Alpha = 0.013686818
Beta = 0.968954762
P for Alpha = 0.08699113
P for Beta = 3.5235e-10
In both the cases once again, p value is considered significant since it is less than 0.05.
2nd Half :
Alpha = 0.000701719
Beta = 0.464056003
P for Alpha = 0.891556342
P for Beta = 5.97433e-05
In this scenario, P value for beta is considered significant but not in the case for Alpha as the value is greater than 0.05.
CAPM takes into consideration the expected return on a risk- adjusted basis. We calculate this by including the risk free asset and the difference between the that is the risk premium the investor has to get for a risky asset (premium).As mentioned earlier, Beta measures the riskyness of the stock.
Berkshire Hathaway Inc has outperformed S&P 500 in certain significant aspects and has a well diversified risk portfolio. Even if the S&P 500 figues vary, the perfomance and growth of the Berkshire Hathaway Inc over the years cannot be overlooked. The company has an impressive overall growth rate and a spectacular return on investment.
Considering all factors such as the Capital Asset Pricing Model (CAPM) and t-test studies, a conclusion can be drawn that the Berkshire Company has and may continue to outperform the figures or predictions stated otherwise by S&P 500 especially due to the fact that they have a well diversified portfolio as well as successful business decesions made by the partnership lead by Warren buffet.
Inspite of the fall in the book value in 2008, the company is still optimistic about a profitable growth in the years to come inspite of the figures laid down by S&P 500.
The conclusion one may draw based upon the facts and figures provided is that no matter what the S&P 500 ratings are for the Berkshire Hathaway Inc., the company is still an ideal choice for investors and other keen financial analysts.