Why Did Bill Gates Buy Berkshire Hathaway?

Bill Gates is a technology icon. Warren Buffett is an investing icon. The two men also happen to be very good friends with a three-decade-long relationship. Over that time, they have partnered on many ventures, both political and philanthropic.

Because of the friendship the two men share, it may come as no surprise that Gates, through his firm, the Bill and Melinda Gates Foundation Trust, has invested in Buffett’s famous firm, Berkshire Hathaway (NYSE: BRK.B). While Buffett may find it flattering, he hasn’t reciprocated by investing in Microsoft, though it’s speculated that the reason is he doesn’t want it to appear that he may have insider information.

Gates is quite the investor as well, though most of his portfolio is centered around his stake in the company he helped found, Microsoft.

Microsoft shares account for nearly 34% of the Gates Trust’s portfolio, but BRK.B is its second-largest holding. The trust owns 20 million shares of Berkshire Hathaway, valued at $7.1 billion. BRK.B accounts for 16.8% of the trust’s portfolio.

The sizeable investment means Gates is all in on Berkshire, and maybe there is a good reason. Since BRK.B hit the market in 1996, the stock is up 1,591.5%, trouncing the S&P 500’s 650% return over the same period. Berkshire shares also edged out the index over the past 12 months. But recent comments by Buffett indicated he thinks the company’s growth has stagnated.

So was Bill Gates right to buy Berkshire Hathaway?

Berkshire Hathaway Has Been On A Tear

For a company that started out as a textile mill, Berkshire Hathaway has undergone quite a transformation since Buffett took over in 1965. Now fully a holding company, Berkshire makes most of its money from its investments.

To be exact, 77% of the company’s $37.57 billion in net income in the 4th quarter of 2023 came from gains. What’s remarkable is earnings increased nearly 108% over the previous year. The big tech rally and the ensuing market lift were a large part of that recovery.

Because the company is so centralized in the stock market, it opens Berkshire up to financial statement volatility. For instance, when the stock market plummeted in 2022, the company suffered an annual net loss of over $22 billion. Buffett constantly encourages investors to pay attention not to the net income swings that are a function of the moods of the market but to operational performance, which has steadily improved over time.

To mitigate overall business volatility, Buffett has tried to hedge against the stock market with his ventures in the insurance and railroad industries. Combined net income from non-stock companies brought Berkshire $8.48 billion in Q4 23, a 28% year-over-year improvement. Subsidiaries like GEICO account for much of that success.

Will Berkshire Hathaway Stock Keep Going Up?

One of the great benefits that Berkshire Hathaway can offer Bill Gates, and everyday investors, is instant diversification. The company is like a mutual fund run by the most successful investor in the world, yet it doesn’t charge fees.

Buffett did raise eyebrows, however, in his yearly letter to Berkshire shareholders. In the 2023 edition, Buffett said the company would only “do slightly better than the average company from here on out.” He was concerned that the company’s size would hinder it from making substantial gains.

Buffett also lamented the lack of quality investment opportunities. Berkshire is still invested in Buffett’s long-time favorites like Coca-Cola, Apple, and American Express. The major new investment for the firm is the 28% stake it took in oil and gas provider Occidental Petroleum.

Do Analysts Agree with Gates View on Berkshire?

Of the few analysts covering Berkshire, most tend to agree with Warren that the firm will deliver ho-hum gains over the next 12 months. The consensus among five analysts is to Hold the stock.

The average price target for BRK.B is $455 per share, which would be a 12% increase from where the stock currently trades at around $406.

The high price target for Berkshire shares is $481 per share, translating to an 18.5% price improvement.

On the low end, the most bearish forecast has the stock rising up by just 6% to $430.22 over the next 12 months.

Is Berkshire Hathaway Stock Undervalued?

The underwhelming forecasts for Berkshire may be in part due to the company’s exceptional rise over the past few years and after reporting another exceptional quarter to close out 2023. It’s currently trading at around 1.5x book value, which lines up with past averages.

For income seekers there is disappointment because, while Buffett is an avid dividend investor, he leaves Berkshire shareholder disappointed that the stock has no quarterly payout. He believes that he is a better allocator of capital than shareholders, hence the reason Berkshire doesn’t pay a yield currently.

Despite not paying dividends, the company does have an enormous stockpile of cash, which totaled $167.6 billion in the 4th quarter. The liquidity serves another function for Berkshire, which is optionality when deals arise, he can pounce.

Buffett has kept the cash on the sidelines to support any insurance payout claims that may arise unexpectedly, and also to ensure he has the reserves to pounce at a moment’s notice when the market dips to levels he believes are a compelling buy as he did in 2008 and 2009.

The cash also serves as a hedge against the company’s heavy stock market exposure and generates massive amounts of interest income. He’s made no bones about his fondness for US treasury bills, and if Buffett took just $126 billion from its reserves and stashed it in 3-month treasuries yielding 5.3%, Berkshire would stand to gain $26 million per day.

Why Did Bill Gates Buy Berkshire Hathaway?

Bill Gates bought Berkshire Hathaway because it offers broad diversification and generates massive amounts of free cash flow, so it is a stable investment for the long-term.

The interest income from Berkshire’s cash alone dwarfs the operations income some major companies receive. While Buffett has downplayed Berkshire’s prospects, and analysts have started to buy in, Bill Gates has stayed the course for a reason.

The company generated record revenue in 2023 and the stock market appears to be poised to continue its upwards climb through the rest of the year. That should keep the company’s portfolio rising and keep Buffett on top.

His longtime friend, Bill Gates, is no slouch as an investor, either. The Bill and Melinda Gates Foundation Trust manages $42.3 billion, and it gained 12.9% in the 4th quarter of 2023 alone. Even if Warren Buffett believes that his firm might underperform in the short term, it’s clear that Bill Gates has faith in his friend.

Even for Buffett, endorsements don’t get much better than that.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.