In his latest letter to investors, Thomas Russo discusses why he continues to hold Berkshire Hathaway saying, Berkshire Hathaway has the least amount of agency cost of any company I follow. Here’s an excerpt from the letter:
Berkshire Hathaway and Nestlé remain key holdings with portfolio weights generally at least 10 percent for Nestlé and 14 percent for Berkshire Hathaway across portfolios. Each are held for specific reasons. Berkshire Hathaway is held because of agency cost. It is my belief that Berkshire Hathaway has the least amount of agency cost of any company I follow.
Agency cost is the propensity of managers of public companies to try to whittle away from owners as much intrinsic value as they can for themselves. The main way that this is done involves stock option compensation and collaboration with Wall Street analysts whose time horizon is unnecessarily short-term. I believe that Chief Investment Officers in a large percentage of US-based public companies underinvest for long-term growth, fearing adverse near-term pressure such investments often have on reported earnings.
I believe that agency cost arises mainly in the area of reinvestment decisions. Reinvestment is the engine of the growth that we covet from your holdings. Managements who underinvest to avoid inevitable burden on reported short-term profits, generated by investments intended to deliver long-term growth in intrinsic value, inevitably under-deliver on potential growth.
Berkshire Hathaway’s orientation is just the opposite. Berkshire Hathaway is driven by maximizing, in a risk-reducing manner, long-term wealth on a per share basis. Often, the reason why investments appeal to Berkshire Hathaway has been that they offer maximum growth in reported wealth that is concealed by near-term adverse impact those investments have on reported short-term results. Warren Buffett’s goal is to maximize long-term wealth on a per share basis. His interest in investments increase when great business franchises are available at below intrinsic value due to most investors’ and most companies’ misplaced focus on short-term reported profits.
You can read the entire letter here:
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