Berkshire Hathaway: The Hidden Costs of Easy Money
Introduction
The pursuit of "easy money" has often been blamed for the financial woes of individuals and nations alike. But what about the impact of easy money on the performance of blue-chip stocks like Berkshire Hathaway (BRK.A, BRK.B)?
Berkshire Hathaway's Returns: A Closer Look
A cursory glance at Berkshire Hathaway's stock price history might suggest that the company has been immune to the allure of easy money. However, a closer examination reveals that even this iconic investment has not been entirely unaffected by the distortions created by low interest rates and quantitative easing.
Returns Over the Past 20 Years
Over the past 20 years, Berkshire Hathaway's stock price has increased by an average of 15.4% per year. This is an impressive return, but it falls short of the S&P 500 index's average annual return of 17.9% over the same period.
The Invisible Partnership
Berkshire Hathaway's history offers a vivid illustration of the invisible and often unrecognized financial partnership between government and American businesses. When interest rates are kept artificially low, businesses like Berkshire Hathaway can borrow money at historically low costs. This cheap money allows them to acquire other businesses, invest in capital expenditures, and increase their earnings per share.
The Consequences for Investors
While easy money may provide a short-term boost to corporate profits, it can have negative consequences for investors in the long run. By creating an environment where companies can borrow and invest cheaply, easy money encourages excessive risk-taking and the pursuit of short-term gains at the expense of long-term growth and sustainability.
Repurchase of Shares
One of the most visible signs of Berkshire Hathaway's response to easy money has been its aggressive share repurchase program. By repurchasing its own shares, Berkshire Hathaway reduces the number of shares outstanding, which can boost earnings per share and provide a short-term boost to the stock price.
The Key Components of Argument
The argument that BRK is made for compounding equity, the core of investing, rests on three key components:
- Berkshire Hathaway's long-term track record of outperforming the market
- The company's conservative investment philosophy
- The intrinsic value of Berkshire Hathaway's underlying businesses
Conclusion
The pursuit of easy money has had a complex and multifaceted impact on Berkshire Hathaway over the past several years. While the company has benefited from the low interest rates and quantitative easing that have characterized this period, it has also faced challenges due to the distortions and risks created by easy money.
For investors, it is important to remember that easy money is not a sustainable strategy for long-term growth. By focusing on companies with strong fundamentals and a commitment to long-term value creation, investors can position themselves to weather the inevitable ups and downs of the market and achieve their financial goals.
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