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Berkshire Hathaway (NYSE:BRK.B) and Brookfield Corp (TSX:BN) are two stocks that are frequently compared to one another. Both are financial stocks, both are involved in insurance, and both have excellent long-term investment track records. Berkshire and Brookfield are so similar, in fact, that Brookfield’s chief executive officer (CEO) Bruce Flatt has been called “Canada’s Warren Buffett.”
Despite all their similarities, there are also many differences between Berkshire and Brookfield. For one thing, one is much larger than the other. Berkshire Hathaway is a $1 trillion behemoth; Brookfield is worth $122 billion (maybe as much as $150 billion if you include the parts of it that are owned by investors in other Brookfield entities).
When comparing two stocks side by side, people often ask, “Which of these is the better buy?” In the case of Berkshire and Brookfield, that may not be the right question to ask. Given their differences in size and leverage use, they are fundamentally different companies: one is more of a defensive play; the other is more of a growth play. The question is whether the Brookfield of today could grow into a Berkshire-like giant someday. In this article, I will explore that question in detail.
Similarities
To gauge whether Brookfield could one day become a giant on par with Berkshire Hathaway, we need to look at how Berkshire got to where it is in the first place. Then, we can compare the Brookfield of today to an earlier version of Berkshire to see if it stacks up.
Back in the late 1960s, when Warren Buffett was turning Berkshire Hathaway into what it is today, the company had the following characteristics:
- A CEO with a strong work ethic and a great investment track record from his previous life as a hedge fund manager.
- A lot of cash to invest.
- A cheap valuation.
- The backing of dedicated and supportive investors.
Does Brookfield have these characteristics? It appears to have at least some of them. Among other things, Brookfield has the following:
- A hard-working CEO whose investment track record has actually been better than Berkshire’s in the last 10 years.
- Considerable cash is held both directly and through the investors in its funds.
- Arguably, a cheap valuation (by some estimates, it trades at a discount to net asset value).
- A supportive investor community, many of whom are long-term holders.
So, yes, Brookfield does have some of the advantages that Berkshire Hathaway had early in the Warren Buffett era. With that being said, there are differences as well.
Differences
Despite all of the similarities it shares with an earlier version of Berkshire Hathaway, Brookfield is also different in many ways. A big difference has to do with the two companies’ approaches to leverage. Brookfield is leveraged to the hilt with far more debt than it has in equity (although it is spread out across several entities and tied to specific properties). Berkshire, however, operates with a minimal amount of leverage. This difference means that Berkshire is essentially less risky than Brookfield, all other things the same. However, it also gives Brookfield the potential for higher returns, which it has, in fact, done over the last decade.
Bottom line
Could Brookfield become the next Berkshire Hathaway? Sure, it could. Its path to getting there is definitely a riskier one than that which Berkshire itself walked, but Brookfield manages its risks intelligently. Personally, I’m quite happy having my money invested in Bruce Flatt’s empire.
