By now, you’ve probably heard the popular refrain that you should never pick stocks based on “potential” (in other words, based on what a company can do in the future).
The sentiment is a bit silly, but it’s not wrong.
A good example of this is Berkshire Hathaway, which has the distinction of having one of the most profitable long-term stocks in the world (see below).
And the reason is simple: Berkshire Hathay is an exceptional stock.
The company has been around since 1901, and has made significant contributions to the economy (see our article on the company).
Its long-lived, relatively low-cost, and highly diversified stock portfolio is what makes it the most valuable stock in the U.S.
The company was founded by Warren Buffett in 1926.
Buffett’s first purchase, in 1965, was a $1.5 billion stake in an automobile company that became General Motors.
In 1968, Buffett bought his second piece of the company, Berkshire Hathoo.
Over the next decade, Buffett made multiple acquisitions, including the $3.3 billion purchase of the Boston Red Sox in 1996.
This was the time of the dotcom bubble, when Buffett’s investment firm was able to turn the value of the stock in Boston’s share price into more than $50 billion, which he sold off in 1999 for more than twice that amount.
While Buffett’s first three acquisitions in the Boston area made the company over $100 billion in value, in 1999, he purchased another $200 million of the city’s stock for just $200,000.
That was enough to buy out the Boston mayor and a bunch of other wealthy investors.
Now, Buffett has sold off some of his holdings in recent years to other investors, but he hasn’t really made any major moves that would make a significant dent in the company’s value.
What this means is that Berkshire Hathie’s market cap has been relatively stable for the past three decades.
However, the stock is also a highly leveraged, high-risk investment.
So, how can you pick a stock based on potential?
To do so, you have to take into account both the company you’re investing in and the company in which it’s listed.
For example, if Berkshire Hathaflown, the largest U.K.-listed company in the United Kingdom, was up for sale, you’d need to take a look at the company it’s currently listed on SIPAC’s “High-Profile Securities” list.
There, you can see that Berkshire is listed as the company that owns about 6.5% of the U:U shares of BHP Billiton (bhpb).
It’s worth noting that Berkshire’s current stock price is about half that of BHPL’s.
But, even with the company down, the value still is quite high.
At $1,000 per share, BHP is the fifth-largest stock in BHP’s portfolio, and it’s worth $10.6 billion.
And, as we discussed in our article on the world’s biggest stock picker, Buffett was able to make several acquisitions during the dot-com bubble.
He bought an investment in a technology company called Verisign in 2002, a stake in a medical equipment company called Medtronic in 2003, and a stake of an oil and gas company called XTO Energy (xto).
So the stock price of the two companies is fairly similar.
When you’re looking at Berkshire Hathy’s holdings, it’s important to consider the size of the stakeholder.
Berkshire has roughly $8.7 billion in total assets.
If you’re buying a stock with $8 billion in cash, you’re paying about $1 per share.
Additionally, Buffett also bought Berkshire Hathworth in 2000 for about $2.2 billion, and Berkshire Hathongue in 2005 for about a whopping $832 million.
Of course, all of these purchases have a price tag.
These stocks are all highly lever-aged.
Because they’re so large, they require the greatest degree of risk to invest in.
How can you get a bargain on Berkshire Hathys?
You can buy it at an attractive price by investing in small, diversified companies that are likely to perform well over the long-run.
Then, when things go wrong, you could invest in large, high risk companies that will suffer a big downturn, but they will probably bounce back and do better in the near future.
To get a better handle on what this means, it helps to look at Berkshire’s holdings over the last 30 years.
Here’s a list of the top 20 stocks listed on the SIPA list of “High Profile Securities” that Berkshire owns.
Click on each of the numbers