Warren Buffett, the legendary investor and CEO of Berkshire Hathaway (BRK.A -0.67%) (BRK.B -0.70%), has built a reputation as a master of traditional value investing. His approach, which involves identifying undervalued companies with strong fundamentals and holding them for the long term, has proven successful for decades.
However, as the world stands on the cusp of an artificial intelligence (AI) revolution, it’s worth examining whether Berkshire Hathaway’s stock portfolio is adequately prepared for the potential disruption.
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This analysis is rapidly becoming an urgent necessity, as AI is poised to enter a period of unprecedented, exponential growth. The convergence of advancements in computing power and the massive influx of capital, with tens of billions of dollars being invested in AI-capable data centers, is set to propel AI development forward at a breakneck pace in the next 18 months.
Buffett has rarely been a fan of cutting-edge tech
Buffett’s stance on cryptocurrencies, particularly Bitcoin, has been unequivocal. In 2018, he famously described Bitcoin as “probably rat poison squared” and expressed his belief that cryptocurrencies would “come to a bad ending.”
While his skepticism toward Bitcoin may be warranted, it raises questions about his outlook on the broader technological landscape, including AI.
The AI revolution promises to bring about profound changes across industries, with the potential for both direct and knock-on effects that prove to be disruptive. For instance, the insurance industry, a key area of focus for Berkshire Hathaway, could undergo substantial transformations as AI improves risk assessment and automates claims processing. It also faces disruptions from the advent of an array of autonomous vehicles.
Moreover, the financial sector, which forms a significant portion of Berkshire Hathaway’s portfolio, may be particularly vulnerable to AI-driven disruption. As AI algorithms become more sophisticated, they could potentially replace human analysts and traders, creating both new opportunities and novel risks for the sector.
Berkshire Hathaway’s significant exposure to the energy sector is another area of concern in the age of AI. For example, AI-driven advancements in renewable energy, smart grid technologies, and autonomous green vehicles, among others could significantly diminish the earnings power of traditional oil and gas companies by the decade’s end, negatively impacting the value of Berkshire Hathaway’s holdings in this sector.
Berkshire Hathaway does have an AI hedge
However, it’s important to note that Berkshire Hathaway’s stock portfolio does include potential AI hedges. The company’s substantial stake in Apple (AAPL 0.55%), which recently announced the advent of “Apple Intelligence,” could help mitigate the risks associated with widespread technological disruption.
Apple’s ecosystem of AI-powered devices, services, and user experiences may help it navigate the changing landscape in the next stage of humanity. Still, the conglomerate’s lack of significant exposure to companies at the heart of the AI revolution is arguably another underappreciated risk factor.
What’s the big picture?
While Buffett’s value investing approach has stood the test of time, it’s crucial to consider whether it adequately accounts for the game-altering potential of the AI revolution. Traditional metrics, such as price-to-earnings ratios and book value, may not fully capture the disruptive impact of AI on industries and business models.
For instance, companies that appear undervalued based on historical data may face unexpected challenges as AI reshapes the competitive landscape. Meanwhile, businesses at the forefront of AI could continue to experience ultra-rapid growth, despite their premium-laden valuations.
Berkshire Hathaway’s stock portfolio doesn’t reflect this important dynamic. Instead, the conglomerate’s equity portfolio is crafted to leverage its massive positions in dividend-paying companies, thereby creating value for shareholders through compounding.
This strategy has worked like a charm historically, thanks to the company’s size and long-term holding strategy. However, if these income streams are disrupted by unforeseen quantum leaps in innovation, Berkshire Hathaway’s core value-creation strategy may come under pressure.
Key takeaways
In ordinary times, contemplating such a drastic shift in the investing landscape would be an exercise in futility, unworthy of serious consideration. However, we are on the precipice of an unprecedented era, propelled forward by technological innovation’s relentless, exponential growth.
This exponential progression is not a hypothetical or a distant possibility. It’s a stark reality that investors will have to grapple with in the imminent future. The rapid pace of change, fueled by a coming abundance of intelligence, is poised to reshape industries, disrupt traditional business models, and redefine the core tenants of portfolio construction.