Why Warren Buffett Prefers Publicly-Traded Companies Over Controlled Businesses

Investment guru Warren Buffett weighed in on several matters that pertained mostly to Berkshire Hathaway Inc.’s BRKA BRKB investments and its future outlook in his annual letter to shareholders released along with the fourth quarter results.

Business Pickers Not Stock Pickers: While explaining the two kinds of Berkshire’s ownership, Buffett noted that the company takes controlling stakes in companies, usually buying 100% of each. The second category of ownership is buying publicly-traded stocks and passively owning a piece of businesses, he added.

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The world’s fifth richest person said Berkshire’s goal through both forms of ownership is to make meaningful investments in businesses with both long-lasting economic characteristics and trustworthy managers.

Buffett said he and Berkshire’s Vice Chairman Charlier Munger decide to own publicly-traded stocks based on expectations about their long-term business performance and do not view the companies as vehicles for “adroit purchases and sales.”

“Charlie and I are not stock-pickers; we are business pickers,” the billionaire said.

Public Portfolio’s Advantage: Buffett said that with publicly-traded companies, it becomes easy to buy pieces of wonderful businesses at wonderful prices. He noted that stocks often trade at truly foolish prices, both high and low.

“Efficient markets exist only in textbooks,” Buffett said, adding that in reality, marketable stocks and bonds are baffling and their behavior is usually understood only in retrospect.

As opposed to this, controlled businesses are a “different breed,” he said. Sometimes, these companies command “ridiculously higher prices” than they warrant but are never almost never available at bargain valuations, he added.

“Unless under duress, the owner of a controlled business gives no thought to selling at a panic-like valuation,” Buffett said.

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