Berkshire Hathaway Inc. investors had plenty to celebrate at the start of 2015. It was Warren Buffett’s golden anniversary running the company, which had grown under his watch from a struggling textile maker to include dozens of profitable businesses like auto insurer GEICO and railroad BNSF. Class A shares were trading close to a record, at $226,000 each.
If anything, though, last year highlighted some of the challenges Buffett faces keeping his money-making machine moving forward. Even as he agreed to one of his biggest deals ever and made billions on an investment in the food industry, the company’s stock slumped. It ended the year down 12 percent, compared with the 0.7 percent fall in the Standard & Poor’s 500 Index. Here are four examples that illustrate why:
Slowing Growth
Buffett highlights a measure called book value per share at the beginning of his annual reports. It’s a rough gauge of what each share is truly worth. For the past five decades, the metric has climbed significantly faster than the S&P 500, helping to propel gains in Berkshire’s stock price.
But the growth in book value per share has begun to slow. That’s partly because Berkshire’s mix of assets has shifted. Early on, the company primarily owned a collection of stocks. Changes in the value of those holdings are recorded on the company’s books every quarter. These days, Berkshire mostly owns and operates businesses, which don’t get marked up in value even if they’re worth more over time. It’s also gotten harder for Buffett to expand book value because the company is much larger now.
Sagging Stock Picks
Three of Buffett’s biggest holdings significantly trailed the S&P 500 last year. The billionaire indicated that he’s sticking by two of those — American Express Co. and International Business Machines Corp. — but he trimmed the Wal- Mart Stores Inc. holding in the third quarter.
Insurance Slump
Buffett has spent decades acquiring businesses, and his company’s operations now span many different industries. Even so, he says that Berkshire’s “core” business is insurance. GEICO and its other operations in that industry provide the money that Buffett uses to make investments. The first three quarters of last year were difficult for Berkshire’s insurance businesses because of higher claims costs.
Still, diversity has its benefits. Overall operating profit was steady through the first nine months because of increased profits from the railroad, the company’s electric utilities and manufacturing businesses.
Gusher of Cash
Perhaps the biggest challenge Buffett faces is investing the cash coming from those businesses in ways that will build value. Through the first nine months of last year, Berkshire spent heavily at its railroad and utilities, which require regular upgrades and maintenance. Buffett also invested more than $5 billion in Kraft Heinz Co., added stocks and acquired one of the largest networks of car dealerships in the U.S.
His biggest deal from last year hasn’t been completed yet. In August, Buffett agreed to buy Precision Castparts Corp., a manufacturer of metal components for the aerospace industry, for about $32 billion. About two-thirds of that will be paid in cash.