I would never buy shares of Warren Buffett's Berkshire Hathaway (2020)

This is an updated version of an article I wrote here on LinkedIn in 2019 .

I'm writing this article for 3 reasons: it may be immediately useful for someone; it entitles me to say "I told you so" in the future; and if anyone else thinks like me, it may help us find each other and connect.

In 1962, Warren Buffett bought out the textile company Berkshire Hathaway, which he converted into a holding company within which he built a diversified corporate empire. That's how Warren Buffet a.k.a the Oracle of Omaha became the third richest person in the World.

I'm not going to analyze the accounts of Berkshire Hathaway because I see no point in analyzing the accounts prepared by the company. You see, the complexity of a company with $818b in assets implies that we - as any financial analyst in the world - have no chance of verifying any number provided by the company. It's a black box.

So, here's what we really know about the Oracle of Omaha and its black box:

• Berkshire Hathaway is a holding company for a multitude of businesses and, with a market cap of $452b, is one of the largest publicly traded companies worldwide.
• One can only imagine the intense work conducted daily with auditors, bankers, politicians, regulators, the SEC, the USA Government and even Presidents and Prime Ministers of foreign countries - the leaders of Berkshire Hathaway having meetings back-to-back with people coming from New York and Washington. And occasionally having to meet the tech billionaires from Seattle and California. So with infinite resources it would make sense to locate Berkshire Hathaway headquarters in the East Coast (New York or Washington) maybe with a secondary office at the West Coast (Seattle or Los Angeles) of the USA. Unless Warren Buffet values privacy more than convenience and access. Then... Omaha is perfect.

• The leaders of this huge holding company are Warren Buffet 89 years old and his partner Charlie Munger 96 years old. They don't retire. Probably because they know what other people don't know - making them irreplaceable.

• By now some of you may be ready to comment "yeah, they are old but a huge company has a big talented team to support the CEO". Because a picture is worth more than a thousand words, see the full Berkshire Hathaway team in 2015. Yep, that's 25 team members. Look at them, one by one, it's not everyday that you can see the people actually managing a $452b market cap holding company.

• Realizing that Berkshire Hathaway corporate office has now 26 people (looks like they went crazy hiring and increased the team from 25 to 26) people develop the explanation that all companies owned by Berkshire Hathaway have a combined work force of 392 thousand staff. So the question is - do they work like a community? E.g. the staff at Duracell helps them control their investment at The Buffallo News? And maybe the staff at BNSF Railway helps them monitor NetJets? If yes,it would be a mind-blowing innovation in portfolio management!
• At this age, and understaffed, Warren Buffet's children should be eager and ready to help their old father. Right? Well, apparently not. Buffet has three children - Susie, Peter and Howard. All 3 are philanthropists. Susie is mostly "only" that. Peter is also a musician. Howard has more business inclination but no hands-on business executive role and dedicates a lot of time to diversified interests like photography and acting as the wealthiest local sheriff in America, in Macon County, Illinois. Yes, sheriff. For real.

• But given that Warren Buffett made a philanthropic pledge to give away 99% of his wealth we may understand that his children are not that motivated to work on preserving and growing their father empire. This philanthropic altruistic generosity is mind blowing particularly because the money - i.e the Berkshire Hathaway stock - is being given to foundations e.g. the Bill & Melinda Gates Foundation that doesn't even carry the Buffet name. Looks like he truly gave it all away just for the benefit of humanity not even preserving his own name for eternity. Well, unless Warren Buffet thinks that both Berkshire Hathaway stock and the Buffet name have no future value and therefore it's better to trade trash for prestige to enjoy while he's alive. And at the same time save his children from having to put out the trash once he dies (those foundations, with other people's name, may have to do that).
• So, what's inside Berkshire Hathaway? The company declares to have the following assets (very simplified) valued at ~$818b: Almost $128b in cash (read this again); almost $248b in equity securities (shares of Amex; Apple; Bank of America; Coca-Cola; Wells Fargo; and other stock any of us can buy directly on the stock market). So, for cash and stock we don't need Berkshire Hathaway - we can keep our cash and buy our stock, even copying Warren Buffet stock choices, with the advantage that if we buy directly we're sure to own the cash and the stock. That's $376b in assets out of the $818b total assets.
• The other $442b are the core of the black box.
• Despite having these $376b in cash and equity securities, Berkshire Hathaway doesn't pay a dividend. Berkshire Hathaway shareholders can only make money by selling shares to other people!
• In the last sentence above, other people doesn't include Berkshire Hathaway. The company did not buyback any shares from 2013 to 2017. In 2018 bought $1.3b and in 2019 $4.8b of its own shares - these two amounts combined represent 1.3% of the Berkshire Hathaway $452b market cap today. It's almost meaningless.
• This year, Charlie Munger didn't participate in Berkshire Hathaway annual meeting and was replaced by Gregory Edward Abel - a Canadian that's Vice-Chairman of Non-Insurance Operations at Berkshire Hathaway. An executive remunerated with exactly the same salary as his colleague Ajit Jain Vice-Chairman Insurance Operations. Each of them gets exactly the same remuneration - $19,014,000 in 2019.
• The only reason the remuneration of these two executives is relevant is that Berkshire Hathaway protects cash at all costs - Buffett's remuneration is $374,773 and he's notorious for living in a modest house and driving a modest car; Munger's remuneration is $100,000; shareholders don't get dividends; shares buyback are meaningless; so... given the company's frugal culture... why are these two guys paid this huge salary?

"Only when the tide goes out do you discover who's been swimming naked" Warren Buffet

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