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Is Berkshire Hathaway Suitable for an IRA?

Berkshire Hathaway (BRK.A, BRK.B) is a conglomerate holding company that is best known for its iconic chief executive officer (CEO), Warren Buffett. Otherwise known as The Oracle of Omaha, Buffett has been building the company for decades and is one of the wealthiest people in the world with an estimated net worth of $106.8 billion net worth as of December 2021.

Berkshire Hathaway started as a textile manufacturing firm in which Buffett began acquiring shares early in his career. By 1965, he took control of the company outright.

Buffett soon began exiting the textile mill business and adding businesses from other industries including insurance, retail, and media to Berkshire’s overall portfolio. Berkshire is still acquiring stakes in financial services, utilities, and manufacturing. Berkshire has a market capitalization of $657.60 billion as of Dec. 20, 2021.

Buffet built a reputation along the way as one of history’s greatest investors, which makes Berkshire Hathaway stock coveted by other investors.

Key Takeaways

Berkshire Hathaway is a conglomerate of different companies whose top holdings include Apple, Bank of America, American Express, and Coca-Cola.
CEO Warren Buffett, is a long-term, buy-and-hold investor who is focused on value.
Buffett’s investment style and choices make for a conservative portfolio with less than average volatility
The company offers two classes of stock–the more expensive Class A shares and the more affordable Class B shares, which are suited to all investors.
Berkshire’s Class B shares are the only ones that can fit into an IRA because of the contribution limits set by the IRS.

The Berkshire Hathaway Portfolio

Berkshire Hathaway is a conglomerate of different companies. It exists only as a collection of stakes in publicly traded companies. Changes made by Buffett in the Berkshire portfolio often move the stock prices of the companies traded and get significant media coverage.

Its top holdings, which comprised about 68% of its overall value, includes:

Apple (AAPL)
Bank of America (BAC)
American Express (AXP)
Coca-Cola (KO)

The big stake in Apple was of particular interest to Buffett-watchers, as he’s historically been averse to investing in technology stocks.

Warren Buffett’s Management Style

Buffett is a long-term, buy-and-hold investor focused on value. He has long been known to focus his investments on companies that he knows. As such, he usually avoids higher-risk, momentum names. His preference is for well-established, slower-growth businesses. Buffett typically makes investments with plans to hold them for at least 10 years.

One of Buffett’s more popular quotes is, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Berkshire’s 2015 purchase of Precision Castparts for $235 per share in cash diverged slightly from Buffett’s traditional investment style. Although Precision falls into the category of businesses that Buffett tends to favor, Berkshire paid a 21% premium per share to buy it, departing from Buffett’s preference for good value in his trades.

On May 1, 2021, Berkshire Hathaway’s vice chairman, Charlie Munger, unofficially announced that Greg Abel would assume the role of CEO when Buffett eventually steps down. Abel is CEO of Berkshire Hathaway Energy and Vice Chairman in charge of noninsurance operations.

Berkshire Hathaway’s Performance

Buffett’s investment style and choices make for a conservative portfolio overall, with less than average volatility. The principle of risk and return suggests stocks with lower risk levels also provide lower return potential.

While Berkshire Hathaway underperformed the S&P 500’s performance over the five-year period ending May 20, 2020, Berkshire did outperform the benchmark index over the 10- and 20-year time horizons. This performance demonstrates that Buffett can deliver above-average returns at below-average risk over the long term.

Income investors likely find the lack of a dividend yield as one of the only drawbacks of investing in Berkshire Hathaway stock. Berkshire has only paid a dividend once in 1967.

For those considering Berkshire Hathaway as an individual retirement account (IRA) holding, this is less of a concern, as withdrawals from IRA accounts are generally not recommended until the individual reaches age 59 1/2 .

The Two Share Price Classes

One of the most unusual features of Berkshire Hathaway stock is its stock price. It never splits. On Dec. 10, 2021, Berkshire Hathaway’s Class A shares (BRK.A) closed at $435,000 per share. This puts even a single share purchase out of reach of many investors. Buffett is clear that he prefers to attract long-term investors as opposed to traders.

In 1996, Buffett partially conceded, issuing a Class B block of shares to make his company more accessible. These shares made a 50-for-1 stock split in January 2010 and closed at $88.23 per share on Dec. 11, 2021.

There is essentially no difference in these shares outside of the stock price. Trading flexibility is the primary advantage of owning Berkshire Hathaway Class B shares.

Does Berkshire Hathaway Fit in an IRA Account?

For most investors, Class B shares are the only option when looking to add Berkshire Hathaway to an IRA. The maximum annual contribution to an IRA is $6,000 a year for 2021 and 2022. People who are 50 and older can make an additional catch-up contribution of $1,000.

This means the Class A shares are not an option unless the investor has built up a sizable portfolio. The Class B shares are within the reach of all investors.

Mutual funds and exchange-traded funds (ETFs) that contain broadly diversified portfolios of well-established, large-cap names are often recommended as core retirement portfolio holdings. Buying shares of Berkshire Hathaway is akin to buying shares of a large-cap value mutual fund. Class B shares could thus make an ideal holding in retirement portfolios.

The Bottom Line

The portfolio’s composition of well-established mature businesses that can operate successfully in most market environments makes Berkshire Hathaway an investment that is appropriate for most IRA accounts. Buffett’s style of investing for the long-term aligns well with the long-term nature of IRA accounts.

Younger investors can use the stock as a core long-term holding for growing portfolios. Retirees will likely maintain a lower equity allocation in their portfolios overall with capital preservation being a primary consideration. However, equities are still needed in these portfolios to help stay ahead of inflation, and Berkshire Hathaway can be an ideal choice to fill out that part of the portfolio.

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