There's really no way to sugarcoat it: The recent stock market action has been ugly. We're now almost officially in bear market territory, down about 17% from the all-time closing high set less than a month ago.
Market action like this is certainly scary. Nobody enjoys watching the value of their portfolio drop.
However, now could be a fantastic time for patient long-term investors to put some money to work, and Berkshire Hathaway(BRK.A 0.69%) (BRK.B 0.19%) is near the top of my watch list. Not only is Berkshire well poised to handle the most massive recession or stock market crash, but it should emerge far stronger as a result. And the weaker the market gets, the more I'd want to hold Berkshire shares in my portfolio. There are two big reasons why.
Berkshire is a cash-rich company and might finally be able to put its war chest to work. Image source: Getty Images.
Reason 1: A rock-solid business model
If you're not too familiar with the current state of Berkshire Hathaway's business, here's a quick summary. Berkshire is an insurance company at its core but has evolved into a collection of more than 60 subsidiary businesses in a variety of industries, such as homebuilding, railroads, manufacturing, consumer goods, and, yes, insurance.
This diversity means that the company's performance isn't too reliant on any of its businesses. For example, if its See's Candies business had a bad year, it would have a minimal impact on Berkshire's bottom line.
More importantly, however, is the nature of the businesses. CEO and billionaire investor Warren Buffett specifically looks for "forever" businesses with durable competitive advantages. Just to name a few examples:
- Berkshire's GEICO subsidiary should be just fine no matter what happens, because even in rough economies, people still need auto insurance.
- Berkshire Hathaway Energy, the conglomerate's utilities business, should continue to generate nice profits as people need electricity despite any adverse economic conditions.
- Berkshire's BNSF railroad business provides a necessary service (shipping), and with depressed oil prices, it could actually benefit.
To be sure, this isn't a universal truth among Berkshire's operating businesses. Businesses like Nebraska Furniture Mart and the aforementioned See's Candies could certainly suffer. But as a whole, Berkshire's businesses are quite crash-resistant.
Also, don't forget about Berkshire's massive over-$200 billion stock portfolio, much of which was handpicked by Warren Buffett himself. Much of the portfolio is also in forever businesses, and many of its stocks generate dividend income that can be reinvested.
Reason 2: Cash, cash, and more cash
While I love Berkshire's business, I'm even more excited about what Berkshire doesn't own yet.
The general idea behind Berkshire's business model is that its operating businesses and stock portfolio generate billions in profit, which can then be used to acquire more businesses and stocks. However, Buffett and his team have had a tough time in recent years when it comes to finding anything to buy at a reasonable valuation. As a result, Berkshire ended 2019 with more than $120 billion in cash on its balance sheet.
Of course, Berkshire wouldn't ever use all of this, no matter how attractive the market got. Buffett insists on keeping at least $20 billion on hand at all times. Even so, this gives it a 12-figure war chest to work with.
Here's the point: Buffett has an incredible track record when it comes to being opportunistic in bear markets and times of panic. For example, he made a savvy investment in Bank of America (BAC -0.08%) in the wake of the financial crisis, which resulted in billions in profits. Several other of Berkshire's largest stock positions originated in the same way.
And Berkshire has never been in such a cash-rich position going into a crash or bear market. For example, at the end of 2007, Berkshire had roughly $44 billion in cash and equivalents on its balance sheet.
Time for Berkshire to be a bit greedy
As Warren Buffett has famously said,"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." And it's pretty clear that there's quite a bit of fear in the market.
In a nutshell, times like this are when Berkshire shines. And Buffett and his team have tons of money available right now to do what they do best. If I were to pick one company that had the best chance of emerging from this market turbulence in significantly better shape than before, it would be Berkshire -- hands down.
Matthew Frankel, CFP owns shares of Bank of America and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
