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I approach investing with a long-term perspective and one way to do that is to think about what stocks I can say today that I would be happy to buy over the next decade.
There aren't many companies that can confidently say they'll be better positioned 10 years from now than they are today, but there's one that stands out from the rest.
Warren Buffett
It would be reckless to assume that Warren Buffett will show up Berkshire Hathaway (NYSE:BRK.B) In 10 years, but I think the business will be in excellent shape.
There's no getting around the fact that Buffett's skill and ability to close deals will be impossible to replace, meaning capital allocation will become much more difficult.
This is probably the biggest risk Berkshire Hathaway takes over the next decade, but the assets the company already has in place will remain extremely valuable.
Whether it's insurance, railroads or utilities, company subsidiaries have some unique advantages over their competitors, and I don't see this changing in the next decade.
Sure
Everywhere I look around Berkshire's subsidiaries, I see enormous competitive advantages. And that starts with insurance, the company's largest operating division.
Berkshire earns a better return on the premiums it collects than other insurers because it invests them in common stocks, rather than bonds.
Typically, other insurers cannot do this. However, Berkshire has so much capital that it can meet its legal requirements while investing its premiums in the stock market.
Over time, this makes a huge difference in the investment returns an insurance operation can generate, and I don't think it's something that will go away when Buffett is no longer at the helm.
Competitive advantages
Berkshire's huge cash balance also benefits its other big subsidiaries, such as its railroad business. The big problem with the railroad industry is that maintaining the infrastructure costs a lot of money.
For most companies, this means significant amounts of debt, but the Berkshire franchise benefits from a source of cash that is readily available from the parent company.
A similar situation applies to the utilities sector. Electric utilities are expensive to manage, which poses a challenge for companies whose shareholders are seeking dividends.
However, Berkshire doesn't need to collect dividends from its subsidiary, so its utilities business can reinvest its cash in new opportunities in a way others can't.
Diversification
It's pretty certain that I won't buy a single stock for the next 10 years. In fact, I'd say it's about as likely as Cathie Wood – rather than Greg Abel – being named Buffett's successor.
One of the main reasons is diversification. I think it is important when creating an investment portfolio and it does not necessarily have to be detrimental to good results.
That said, owning the best insurance operation, the best railroad, and the best utilities business does constitute some diversification, and that's what Berkshire Hathaway stock offers.