Which Will Perform Better: Berkshire Hathaway or Utility Stocks?
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Walk a money for the rest of us. This is a personal financial on money, how that works, how to invest IT and how to live without worrying a badge. I'm your host, David stein. Today is episode four sixty nine. It's titled which would be a Better investment work, your hathaway or utility stocks.

Five years ago, an episode two, we released an episode tle, should you let, warn, buffer, manage your money? In the episode, we evaluated burger half away as we would an outside money manager that we were going to hire. I spent over fifteen years as an asset manager, but also called a research group that researched the money managers.

Long only stock managers, hedge funds and other asset classes are process focused on the people whose making the purpose lio decisions, what is their process and what has the performance been back in two and nineteen when we released that episode, berger hathaway b class shares we're selling for two hundred dollars. One could have effectively warn buffer. Charlie monger and the other leaders of birch had to manage your money.

Every february, picture hato releases their annual letter that warn buffer write in that favorite twenty and nineteen episode we reference to twenty eighteen and your letter in which buffett wrote with A G. Jane and greg able running Operations, a great collection of businesses, a niagara of cash generation, a kada of talented managers and a rock solid culture, your company is in good shape for whatever the future brings. In that annual letter, butt talked about how he and his long time partner, charlie monger, evaluated companies, evaluated the stocks to purchase.

Now five years have passed. Charlie monger passed away late last year at aged and ninety nine. Buffet is ninety three.

He is still the chairman in C, E, O. A bircher half the way he has revealed that greg able is his pic to succeed him as the C. E.

O. Eventually, although buffet is still very much involved, but IT wrote, greg would be more successful than I have been, and if I said otherwise, my nose would grow. Abl is now sixty one.

He is in charge of all bertuol non insurance businesses. Percha hathaway owns sixty five companies, including insurance companies such as I go, railroads, utilities, which will talk about some in this episode. In reading the twenty twenty three and a letter that came out last month, there was one paragraph that really stood out out to me that I very much appreciated buffett road.

Nevertheless, managing burger is mostly fun and always interesting. On the positive side, after fifty nine years of assemblies, the company now owns either a portion or one hundred percent of various businesses that on a weight basis, have some wet, Better prospects than exist at most large american companies. By both luck and pluck, a few huge winners have emerged from a great many dozens of decisions.

And now we have a small kadja of longer managers who never muse about going elsewhere and who regard sixty five as just another birthday. Many of bircher hathaway leaders enjoy what they do and aren't retiring anytime soon. They live like they're already retired. And that has made to burger hathaway success.

There are some chAllenges though, which is why we're sort of looking at what about going forward, how will bircher hath way do? Would IT be Better to purchase a utility etf, this picture pathway becoming more like utility because of the huge cash generating ability and the sheer size and scale of the company. But IT rights I go at picture is simple.

We want to own either or or a portion of businesses that enjoy good economics and that are fundamental and enduring, he points out, is very, very difficult to predict which business will be a winner or loser. And those who tell you they know the usually either self delusional or snake oil salesmen there one investment rule is never risk permanent loss of capital. And he mentioned the benefit of the tail win of american from the part of compound interest have helped burger hathaway over the years.

Burger hathaway that doesn't pay a dividend. Many of its businesses generate dividends, but burger hathaway doesn't IT does buy back stock. But there's a chAllenge with bertier hathaway now its cash baLance keeps growing. There's one hundred and sixty eight billion dollars of cash on its balancing that increased by thirty nine billion dollars over the past year.

Historically, bertier hathaway has used that pilot h to make acquisitions to and to its portfolio of companies, but bircher has way is so large that buffett rights to remain only a handful of companies in this country capable of truly moving the needle at burger. And they have been enlisted, picked over by us and by others. Some we can value, some we can.

And if we can, they have to be attractively Priced. Outside the west are essentially no candidates that are meaningful options for capital deployment at burker. All and all, we have no possibility of eyehole performance.

Those are superin comment, but that is suggesting that there are not necessary you can be able able to find some big acquisition that could have a meaningful impact on the company and as a result, but that writes that burker should do a bit Better than the average american CoOperation and more important, should also Operate with materially less risk of permanent loss of capital. Anything beyond slightly Better, though, is wishful thinking. Things have changed at burger hathaway.

Is scale its size, the fact that charly monger is no longer there? Before we continue, let me pause and share some words for one of our sponsors, shop fy. If you're running a new or existing business, I can't think of a Better partner than shop fy.

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So how did the stock do over the past five years since we released that episode? Well, IT doubled in Price. The beat clash shares were at two hundred dollars in february twenty and ninety.

As of early march twenty, twenty four, the b clash shares sell for just over four hundred dollars. That's a fifteen percent analyzed return. If we compare that to the S P.

Five hundred, IT did the same fifteen percent and Alice return IT matched. That was one of our points back in three, two and nineteen. Is that essentially burch a half way, given its size, was was having a difficult time out performing.

The S N P. IT had basically trailed slightly over the previous fifteen year period, even though since one thousand nine hundred and sixty four burker shares have returned four point four million percent cumulative versus thirty one thousand percent cumulative for the S P5 podder。 The level of our performance since them in sixties has just been outstanding, almost done believable.

But the power of compound, it's remarkable that given its size, burt che has been able to actually appreciate fifteen percent analyzed IT match the S N P, but did much Better than your typical active manager. If we look at morning stars annual study on the success rate of active managers, the percent that have outperformed a passive tf, so A U S, large ended manager seeking the outperform the S M P five hundred, only ten percent have outperformed the S M P over the past decade, nine percent for the past fifteen years and twenty years. So the fact that berkshire ched the nx is good, great, really, compared to its competitors buffer back in the twenty eight.

And report said, diversity is a protection against ignorance. IT makes very little sense for those who know what they are doing, but he qualified that the goal, the non professional, should not be to pick winners. Neither he nor his helpers can do that, which would rather be to own a cross section of businesses that aggregate are bound to do well.

A low cost S M P five hundred index fun will achieve this goal, and IT has its match, the return A B hathaway with less volatility. The standard deviation of the S M P five hundred over the past five years is nineteen percent. This is a measure of volatility, how dispersed the returns were relative to the ava return, but hathi's and a deviation was twenty point six percent.

So just a little more violates le than the S M. P. Over the past five years. One of the things I really appreciate about one buffett is how Frankie is in his annual letter, owning up to chAllenges and admitting to mistakes. One of those chAllenges and mistakes, as he would call IT, is bircher healthy energy.

He talked about how the electricity business has changed over the years and that we were discussing whether to invest in utility funds, a utility etf or burger hathaway now on the surface, but your hathaway done much Better than utility. And so it's somewhat of a kind of a false argument as will see utility funds because buffet discuss some of the chAllenges is something that we are often asked about. Should we should we invest in utility as as a cash generating investment, given the dividend yields are three and a half percent, buffet discusses the the model of how electric utilities work.

Most, if not all, are regulated. They have to report to some type uti commission on a state by state basis. And because of the need for utilities to build out power lines and power plants, the lead time to do that is, is very long and the mana capital IT takes is quite large.

And as a result, utility company, these electric utilities work with states to set the rate. And there's essentially some guaranteeing some predictability in terms of the revenue in order to service the debt and have the equity capital necessary to make is very long term commitments. Buff had mentioned that burger hathaway energy has a multistate transmission project in the west.

One of their major utility holdings is pacific core. And this project we've been working on since two thousand six and it's it's still not done. But when IT is IT will serve ten western states and comprise about thirty percent of the acrid of the continental us.

The utility model in working with the states allowed utilities to earn a stable, solid return in investing capital. And that's what attracted buffet and burger hathaway to the business model. But there has been an increase in web fires out west, and there has been lost suits against utility companies because in some cases, a downpour pool or or some other electrical line helps Spark or spread.

The wolfie pacific core faces potentially eight billion dollars of damages due to a twenty twenty while fire because IT failed to shut off parallax es. In fact, if if you live in california, you know that many to what is there, they cut off power theyll rolling blackout because if winds are super high though, cut power in order to reduce the risk of a one fire starting buffer in the end. Reports said that berkshire has made their best estimate for the amount of losses that have occurred.

Those cost cost rows from forests, fires whose frequency and intensity have increased and will likely continue to increase if convective storms become more frequent. And as we've mentioned, with climate change, with rising temperatures that leads to more thunderstorms, more flooding. We look at this and episode last year, are natural disasters increasing.

We we learned that forest fires across the world are actually not increasing because agriculture is increasingly there's just Better forest management, but not everywhere and in areas that are getting warmer, such as the western U. S, there have been more forest fires. And now utilities face potential liability to where there's the survivors threaten.

P, G, N, E filed for bankrupcy in in two and nineteen eventually emerged, but because of liability related to fire and and in buffer rights, a confiscated tory resolution of our present problems would obviously be a negative for future hathaway energy that if they lose this lawsuit, but he continues that company in burchill is structure to to survive negative surprises. We regularly get these in our insurance business where our basic product is risk assumption and they will occur elsewhere. Picture can sustain financial surprises, but we will not knowingly throw good money after bad.

Any suggest that investing util is just not going to be as safe as IT has been in the past because of the potential liabilities and just the sheer cost. He points, if if they have to bury power lite, just how expensive that will be here in two son, there's been ongoing back and forth between the need for two sons power to build additional power line through the middle city. The neighbors don't want that.

They want IT buried. But who's gonna? The cost is incredibly expensive to bury parallels. Buffer says eventually there not might not be A A private, public model of utilities anymore. There they'll be owned by the state, by the government. Buff concludes when the dust settles, americas paranoid and the capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns along with burtis two partners at B A, G.

I made the costly mistake, is not doing so, but it's suggesting that is the regulating environment that is becoming more chAllenging, including lawsuits that perhaps they're not able to raise the rate as much as they want to basically cover the cost of bearing power lines or things such as that. Although critics will say their power companies skipped on line maintenance in capital improvements but is not an easy business before we continue, limit, pause and share some words from this week. Sponsors, your business was humbling, but now you're falling behind teams, buried manual work, taking forever to close the books.

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That comes slash David to get your own KPI checklist. That sweet outcome, slash David. What I didn't know, and I just learned this a few days ago as I was talking to camden.

We've lived out west in the mountain states for over twenty years now, and i'm used to cheap power in idaho at a cabin, we pay thirty five dollar line maintenance fee, and then we pay six cents per kilowatt hour per part. We also have solar panels that we can actually reduce our electricity use and even sell excess power back to the grid. So I was shocked when Cameron mentioned that they're per killing at our charge in the bay area is over fifty cents per kilo.

What hour? A study by the energy institute at U. C. Berkeley host business school and the on profit ting tank next ten found that P G, E customers, and which my son one, pay eighty percent more peculiar hour than the national average.

The national average on a per cullet hour basis is around sixteen cents, and that's what we pay in. Two in idaho is sick sense, at least our little local power company. Why is IT that california has such high cost? And there there's multiple reasons.

IT isn't just because of forest fires, is the geography of california. It's big, it's massive and the weather is great, which means they're not having to run air conditioners as much and they're not having to use electricity to heat their house. And so on a about A B T U basis, california ranks fifth in terms of the amount of power used per person.

And if you're using less power per person, yet you have all this infrastructure, generate the power and Carry out over transmission lines and upwards of forty percent of the the heat lost or powers loss through transmission lines, then each person has to pay more on a per cult our basis to cover this fixed cost. Montana and arctic koa and wyo. Omi use the most power per person.

This is residential use, cold there. So they're using IT to electricity. And IT IT be dark there in winter also. So there's some basic economics of power in california is just more expensive.

But when we think about utilities, they do have these huge capital investments, both to sure the stability of the grid protected from natural disasters, but there's the the renewable energy transition as many power companies have moved away from coal, which can be very inexpensive if you have an. Existing plant to more renewable sources, but there's all these capital costs and now the potential liability that they're facing. And so we think about investing in tilities, but it's suggesting that we could putting good money after bad, we step back and think why how has utility is investing done?

The van guarda tilly etf, tiktok, pu sponsorship, zero point one percent. Sixty five holdings, the divided yields three and a half percent. If we look over the past five years, IT returned four point four nine percent analyzed return.

So IT has lagged the S P. Five hundred and bircher head away by ten percentage points. We go back twenty years.

Utilities have done Better relative to the S M. P. Eight point six percent. There s nine point eight percent for the S M P. Five hundred. I was shocked thinking, while utilities are known for their stability, they've actually been slightly more valuable than than the S M P five hundred. There certainly get some tion benefit.

So last year, utilities lost seven and hf percent, while the S P five hundred gained twenty six person, wherein twenty and twenty two the vanguard utility etf return one percent, while the S M P five hundred lost eighteen percent. And so there is some correlation benefit to investing in utilities by utilities certainly had a chAllenging twenty twenty three because interest rates are going up and because utilities are interest rates sensitive, partly because investors want the divided. But if you're dividin three and a half percent, that's great when yields on cash were close to zero, but now yields on cash, cash or over five percent, it's a why take the volatility of utilities when you can earn five percent on cash?

In addition, utilities are struggling because as interest state school up, like many businesses, they have huge capital projects to build out the grid, renovation, energy so that the cost of debt is going up. Utilities have their highest debt cost that they've seen in, in decades and their leverage is going up. They're having to take on more leverage as they're facing these big capital expenditure.

If we think about a reasonable return going forward for utilities, they're yielding three and half. If they could grow that divided in a learnings four percent, that's a seven and a half percent return. The alternative is Better. Hathaway, which doesn't pay a dividend, but her right bircher does not currently pay dividends, and its shary purchases are one hundred percent directionally.

I could see a time, though, if burker hathaway is not finding ways to deploy its cash and purchasing other companies, and last year, IT bought back nine billion dollars of stock, yet its cash baLance still increased thirty nine billion at some point, burker hathaway will probably initiated dividend, and it'll be a dividend stocks. We discuss divided stocks a few episodes ago. There will be interesting to see what that division yield would be, but we saw how meta stock jumped after the dividend was announced.

And i've been interesting to see if the same thing, what happened to burger half and way, if in when they start paying a dividend, their underlying companies are paying dividends that now burch's been able to deploy the capital in new acquisitions. But buffer mits, there were very few acquisitions of any that they could use that big cash baLance they have. So we can get a three and eight person given deal with utilities.

But we know there there are some chAllenges. V, P, U, the vengeful utility. T, F, has about sixty five holidays. Burger hathaway, as around sixty five companies.

Logic cash perches is more diversified in terms of its industry exposure with insurance, railroads, manufacture, tumor products, retail and utilities. If I had to choose between the two, i'll invest with burger hathaway even though there's no dividend currently. I do have some utility exposure.

I own the mercury first trust global infrastructure fund. So IT has utility as well as energy infrastructure, including ml peace, the tickers mfd. I've wounded three years. It's done about as well as the vanguard utilities etf.

I like IT though because I bought IT at a discount to its net value, about a thirteen percent discount and its distribution rates much higher because that uses leverage. And because of the discount, its current distribution rate is eleven percent. We discussed this last month in one of our plus premium episodes because there's a big proxy battle right now for M F D.

Mccurry once has sold a number of its funds to aberdeen, and now there's a proxy battle to merge IT, but sob capital and activist hedge fund is fighting a proxy battle to get board seats so that they believe there are more shareholder friend's ways to reduce the the discount to net asset value for M, F, D. So there there are more aggressive ways to play utilities like I have, and not every utility is in the western U. S.

With wildfire risk. They are more violated than the S. M. P, at least over the last five years. They do face chAllenges, but gently, we want greater diversification.

So burch, hathaway is one way do that, but they only match the S. M. P. Five hundred, we could have owned the S M P five hundred etf as buffet recommend.

I prefer the dynamism of broad based D T S, how the company makeup can change over time as the economy evolves and we can participate in that dynamism. I don't do a lot with sector E T S. I want to own the entire pie.

I have some minor exposure. I sem T, S and exponents technology and a small util. I do some breads to commercial real state sector.

But gently, I think most people are Better of owning a broad based etf and then they come compliment that with other things, including burger hathaway. So if I have to choose to in Better health way and utility and the utility T S. Going forward, i'll go with burger health way IT more diversified antil for that big dividend at some point.

But ultimately, I would prefer a road based etf that invest in all types of stocks, not just sixty five, but hundreds, if not over a thousand. That's our discussion of berger, hathaway versus utilities. Thanks for listening. You may be missing some of the best money for the rest of us content. Our weekly insider guide de email newsletter goes beyond what we cover in our podcast episodes and helps elevate your investment journey with information that works pressed in, written in visual formats.

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