How To Not Lose Money Owning Berkshire Hathaway

| About: Berkshire Hathaway (BRK.B)

Summary

Recently I came across a remark detailing that an individual had owned and lost money with Berkshire Hathaway on three separate occasions.

This article provides some insight on the historical returns of the security.

In the end, "not losing" is often mitigated by having a long-term mindset.

Recently I came across a remark indicating that an individual had owned shares of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) on three separate occasions and lost money each time. Naturally market pricing tends to ebb and flow, but this struck me as a bit odd. Here you have such an overwhelmingly successful business - pumping out profits after profits, year after year - while gaining ownership stakes in more and more businesses to boot. The long-term record has naturally been spectacular, but even the last decade has been quite adequate.

Obviously the key to "losing money" is selling for a lower price than what you paid. Yet given the growing nature of the business and underlying earnings machine, this becomes more and more difficult over time. Thus the key to not losing money (with Berkshire or a collection of holdings) tends to be rather straightforward: have a long-term mindset. I'll show you what I mean.

Without stock splits or dividends, the return history of Berkshire Hathaway would be fairly easy to aggregate. Yet there's an even simpler way to find this information. The 2014 Berkshire Hathaway shareholder letter lays out the annual per share market value change dating back to 1965.

There have been 11 years out of 51, dating back to 1965, where Berkshire Hathaway's share price has ended below where it began. Of course this certainly does not dictate the future, but historically ~80% of the time had you bought at the beginning of the year the share price would have been greater by year end.

Of those 11 times when the share price was lower, in six instances you had a follow up "snapback" year. That is, in more than 50% of the cases the year after the price decline the next year increased by more than enough to make up for it. So historically speaking, looking at 2-year stretches it becomes even more difficult to lose money.

Starting in 1973 appears to be some great tragedy from first glance. The share price was 2.5% lower in that year, followed by a -48.7% decrease in 1974. A $1,000 invest would have turned into $500 in just two years. Or at least that was the liquidity price at which you could sell shares, should you wish to do so.

Yet as you may know, this would not last forever. The 129% return in 1976 quickly restored your wealth level back to even and then some. Moreover, had you held from 1973 through 1983 you would have seen your wealth compound 16 times over - despite being cut in half to start the period. Indeed for the long-term owner this turned out to be no great tragedy, and "breaking even" took four years, before substantial gains came about.

The longest period you would have had to wait to "not lose money" was actually fairly recently. Had you nearly timed the top and bought at the beginning of 2008, you would have instantly seen a -32% price decline. From there, shares advanced for two years, declined slightly, and then advanced in the next three years. It took six years to get back to even and now shares are reasonably higher than they were.

So that's the first part of it. Obviously history does not dictate the future, but it does give you some context in relation to an improving business. The way to lose money owning shares of Berkshire Hathaway thus far has been to have a short-term mindset.

Buying to start 2008 and selling a year later, or at the start of 2011 and selling a few months thereafter. That sort of thing. Yet with a truly long-term mindset, you couldn't find a six-year calendar period in the last half century where shares traded lower. The long-term mindset, when coupled with an ultimately improving business, takes away quite a bit of the downward possibility.

The second thing to note is that you're not limited to purchasing just once and then sitting on your hands and hoping for capital appreciation. Even if you wanted to do that, it's an unlikely circumstance in that you are apt to be paid biweekly or monthly and not by the decade.

Take 2008 through 2012 where the stock price of Berkshire Hathaway effectively started and ended at the same place. A lot people would see that and think about a stagnating investment that went nowhere. Yet it's important to realize that you're not stuck in that framework.

Yes, shares began and ended the period in the $90's - in turn resulting in a very small or nonexistent gain during that time. However, that didn't prevent you from buying shares in the $50's in 2009, in the $70's during 2010 and 2011 or in the $80's in 2012. Had you done so your returns would have been much greater than what a typical stock chart might represent. We invest regularly and over a great deal of time - not just once.

Furthermore, you're not even bound to simply buying once or buying many times. You could also elect to do things like sell covered calls above your cost basis - thus gaining intermediate cash flow. This does one of two things. Either it takes some of the "blow" out of a lower share price, or it forces you to make money by selling at a higher price. The idea is that you have tools in your investing toolbox.

Again, none of this is to suggest that it has to play out that way in the future. Yet it should nonetheless be instructive: as profitable businesses become more profitable the share price generally follows. Not immediately, not linearly, but eventually over time.

A good way to lose money by owning strong and ultimately growing businesses is to jump in and out: "In today, out 6 months from now, 'Oh, I lost money, try again.' That's not investing, that's speculation. It's part of the reason why you hear about those studies where investors' returns average 3% as compared to 8% returns that a simple index fund would have accomplished. It's not the most exciting route, but consistently allocating capital toward profitable businesses and keeping a long-term mindset make it a whole lot easier not to lose.

Disclosure: I am/we are long BRK.B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.