Finance
Berkshire Hathaway Has Survived Every Recession Since It Was Founded — Here’s Why
Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) has proven to be one of the most successful investments of all time. A lot of that has to do with the investing prowess of its longtime leader: Warren Buffett.
But Berkshire Hathaway isn’t a one-trick pony. There are many reasons for its long-term success. And one of them has to do with how the company navigates recessions. Most companies fear a bear market. Berkshire Hathaway, however, often grows stronger during these difficult periods for one reason.
Most companies — indeed, even most investors — don’t grow excited when asset prices fall. Lower stock prices typically mean less capital available overall. Short-term loans may become temporarily more expensive. At worst, accessing capital in general becomes more difficult, if not impossible.
Berkshire Hathaway has an advantage few companies can match.
Berkshire Hathaway (BRKA +0.96%)(BRKB +1.26%) has proven to be one of the most successful investments of all time. A lot of that has to do with the investing prowess of its longtime leader: Warren Buffett.
But Berkshire Hathaway isn’t a one-trick pony. There are many reasons for its long-term success. And one of them has to do with how the company navigates recessions. Most companies fear a bear market. Berkshire Hathaway, however, often grows stronger during these difficult periods for one reason.
Berkshire Hathaway
Today’s Change
(1.26%) $5.97
Current Price
$478.78
This is why Berkshire Hathaway can grow stronger during a recession
Most companies — indeed, even most investors — don’t grow excited when asset prices fall. Lower stock prices typically mean less capital available overall. Short-term loans may become temporarily more expensive. At worst, accessing capital in general becomes more difficult, if not impossible.
While Berkshire is likely hoping that a recession or market correction does not occur, it isn’t the worst thing in the world for those typically negative events to happen. Allow me to explain.
Image source: The Motley Fool.
At the core of Berkshire’s business empire sits a portfolio of insurance companies. Here’s how insurance economics work. An insurance underwriter typically receives payment up front for policy premiums. Much or even all of those premiums are later returned to policyholders once claims are filed. So while many insurance underwriters try to book a profit on these policies, a strict underwriting profit isn’t necessary. Even if the underwriter returned 100% of premiums to policyholders, it could still generate a net profit. That’s because the company can earn interest on the policy premiums until they are required to be paid out.
Buffett terms this excess investable cash “float.” And while it’s less important than in years past, it essentially gives Berkshire a regular cash flow of investable capital, whether markets are hitting all-time highs or at record lows. Few investors or businesses have this sort of lifeline when capital grows scarce.
Even more relevant today is Berkshire’s growing cash hoard. As of last quarter, the company has around $373 billion in uninvested cash. While Buffett has long warned against market timing, Berkshire’s cash hoard often grows when the firm has trouble finding attractive investments. In this way, Berkshire is able to have less risk exposure at record highs, with investable cash available when prices move lower.
With $373 billion ready to deploy at a moment’s notice, Berkshire stock is actually very compelling to those that believe a bear market is around the corner. Berkshire’s existing portfolio would undoubtedly take a hit in this scenario. But if asset prices fall, Berkshire has the rare opportunity to set its portfolio up for decades to come at more attractive prices.