Warren Buffett’s Berkshire Hathaway has long been known for outperforming the market with its value-oriented stock picks. However, in recent years, the company’s biggest holdings have been struggling to keep up with the S&P 500. So where is Berkshire Hathaway finding its success?
The answer lies in the conglomerate’s privately held businesses. While Berkshire holds a small number of publicly traded stocks, the majority of its operating cash flow comes from its over 60 privately owned companies. These businesses, which include well-known names like GEICO Auto Insurance and Dairy Queen, generate between $40 billion and $50 billion in operating cash flow per year, far surpassing the value of the publicly traded stocks in Berkshire’s portfolio.
For investors looking to emulate Buffett’s success, the challenge lies in the fact that these privately owned businesses are not publicly traded. However, there are alternative options available. Private equity firms like Blackstone offer investors the opportunity to invest in a portfolio of promising companies that are not publicly traded. Similarly, business development companies like Prospect Capital provide capital to mid-sized companies and offer attractive dividend yields.
As the stock market continues to reach high valuations, investors may want to consider alternative investment options like private equity and business development companies. With the private credit and equity markets expected to grow significantly in the coming years, following Buffett’s lead in focusing on privately owned businesses could prove to be a wise strategy for investors looking for higher returns in a challenging market environment.
