Summary
- Warren Buffett's "secret" investment by itself is no reason to invest in Berkshire Hathaway.
- The company has a long impressive history of generating exciting investment opportunities for shareholders.
- In 2008, the company generated massive shareholder returns by taking advantage of the downturn to capture unique investments. BNSF, BOA, etc. generated tens of billions of dollars in shareholder value.
- The real risk of Berkshire Hathaway is trusting the company to be stewards of capital, but the company has done well so far.
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The news rumors have been circulating over the past month about Warren Buffett (NYSE: BRK.A) (NYSE: BRK.B) building up a "secret" position. Recent articles have come up on Seeking Alpha purporting to discuss the secret investment. Of interest to us was one which specifically said that an exciting secret investment would be the reason to invest.
While I acknowledge that many investors invest in Berkshire for diversification benefits, that's not me. If Berkshire announced a major deal in the coming months, however, I will reassess the growth profile of the company to determine whether return expectations and risk characteristics match my investment objectives and risk profile.
However, as we'll see throughout this article, a "secret" investment from Berkshire Hathaway shouldn't be the reason to invest. Rather Berkshire Hathaway has a long history of generating massive shareholder returns from unique opportunities. As we'll see throughout this article, the BNSF, Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS) are examples of how the company did this previously and we expect will be able to do this going forward.
Unique History of Opportunities
Berkshire Hathaway has an impressive cash position and a unique history of receiving new opportunities due to its cash position. No better time indicates this than 2008. The company made numerous investments during this time period, investments that it could only make because of its massive cash position.
Some investments the company made during the 2008 collapse and subsequent year include Bank of America, Goldman Sachs, BNSF, Wrigley's, USG, and many others. Most importantly, through the collapse and subsequent years, the company deployed more than $60 billion, showing its ability to rapidly deploy its cash pile as opportunities presented themselves.
The company's most significant investment from the time period was BNSF, the company's largest ever acquisition. The company purchased $34 billion in stock and assumed $10 billion in debt. Based on Union Pacific's (NYSE: UNP) current valuation, with BNSF a comparably sized company, that investment is now worth well over $100 billion.
At the same time, Warren Buffett dove straight into the heart of the collapse. The company bought $5 billion in Bank of America preferred shares at a 5% coupon. He then exchanged them for warrants for 700 million shares of Bank of America. Those shares are worth roughly $20 billion today, highlighting the massive returns.
Other investments in the banking industry include $5 billion in Goldman Sachs preferred stock, which generated a multi-billion dollar profit. The company also purchased General Electric preferred equity. In the bond markets, the company was active. It helped Mars acquire Wrigley buying bonds of the company at an 11.45% coupon. It issued Harley-Davidson $300 million in bonds at a 15% coupon.
Most importantly, it managed to aggressively deploy a $50 billion cash pile down towards Warren Buffett's minimum of ~$20 billion. With market cycles continuously underway, and Warren Buffett having near $150 billion cash pile, we see no reason why he won't be able to easily do the same during the next collapse.
