A Defensive Investment for Uncertain Times

With the Dow, Nasdaq and S&P 500 all hitting new highs on a regular basis, I’m starting to get more defensive in my investing.

While my goal is to always seek out the best investments at the lowest cost, when the market begins to look like it could be peaking and getting ready for a fall I want companies that will most likely survive the fall with little damage or may even thrive in a market pullback or even a recession.

Usually, these kinds are companies are diversified conglomerates and consumer staples such as Johnson and JohnsonPepsiAltriaKraft, or GE as no matter what happens to the economy people will continue to eat and buy the everyday necessities that these companies provide. Also, these kinds of companies have much global exposure, so if things are bad here in the US, their international operations will pick up the slack.

However, there has been one company that I’ve always considered, but never pulled the trigger to buy and now it just feels right and that company is Berkshire Hathaway, the company run by billionaire investor, Warren Buffett. Not only is Berkshire Hathaway a diversified conglomerate, but it has interests in many consumer staples. There are also many other reasons to like Bershire Hathaway. Here are a few…

  • A very long record of steady growth.
  • The most successful investor ever, Warren Buffet, running the company for only $100,000/year. A real bargain! Much better than what you would pay a mutual fund manager, but with the similar benefits of buying into a mutual fund.
  • Management’s pay is tied to the performance of the stock, meaning that they have a strong interest in seeing the stock increase in value.
  • Management has had a long history of honesty, integrity and frugality.
  • Berkshire’s holdings are strong and divisified.
  • Berkshire’s main business of insurance, which includes Geico (of which I am a customer), produces large floats (which is the cash remaining of insurance premiums paid after all claims are paid). The float is used by Buffett to purchase more great companies.  The best part about the insurance business is it’s a business where the customer pays and hopes to never receive it back!
  • Buffett is great to picking great companies with distrissed prices. So, any downturn in the market will provide him more opportunities to make great deals.
  • As mentioned earlier, when there is market downturn, investors usually sell riskier investments and put their money in safe investments such as Berkshire, which should automatically increase the price of the stock as demand increases.
  • And best of all, Berkshire is currently undervalued! The stock is currently undervalued by 5-12%, by conservative estimates.

The negative about Berkshire for a lot of people is that the actual cost per share is quite high. Berkshire Hathaway Class A shares go for $108,351.00 and Class B shares go for $3,604.30. Buffett has chosen to not split the shares because he wanted real investors to own share, not traders.

This also helps keep the price stable. He did introduce the Class B shares a while back which does make it more affordable. The only real difference between the two is that Class B shares don’t have voting rights and Class A shares can be converted in 30 Class B shares, but not the other way around. This keeps the price ratio 1/30 most of the time.

There are other companies that are similar, where the CEO runs the company in a similar manner as Buffett runs Berkshire. These are Sears HoldingsLeucadia National Corp, and Markel. All three have well known investors running the company that seek to increase revenue’s by reinvesting excess revenue generated by the core businesses. They also invest in a similiar fashion as Warren Buffett and seek to emulate Berkshire in various ways and their prices per share a lower than Berkshire.

I currently have all three on my watch list and am waiting for a good entry point.

Full Disclosure: I own shares of Pepsico, Altria, Kraft and most recently I initiated a position in Berkshire Hathaway (Class B shares).  Also, I am a Geico customer, which is fully-owned by Berkshire Hathaway.