Bill Gates is one of the richest people in the world, with an estimated net worth of over $125 billion. Today, the former head of Microsoft runs one of the largest charitable foundations in the world.

Not surprisingly, Microsoft is the foundation’s largest holding, accounting for over 30% of the portfolio. After increasing its stake in Berkshire-Hathaway (BRK.B 0.97%) (BRK.A 0.94%) by over 40% in the second quarter, the conglomerate is now the Gates Foundation’s second largest position with over 20% of the portfolio, surpassing Waste management.

The Gates Foundation did not purchase Berkshire stock on the open market. Instead, the shares were gifted to the foundation by Warren Buffett. However, this could very well be the last donation of Berkshire stock to the foundation, as the friendship between Buffett and Gates has cooled recently. Buffett has since stated that the foundation will no longer receive donations after his death. This is a change of heart, as gifts to the charity were originally provided for in his will.

Despite the drama between Gates and Buffett, let’s look at why the Gates Foundation will likely keep Berkshire as a core holding going forward and why investors should hold the stock as a core holding as well.

Instant diversification

One of the first things that stands out about Berkshire stock is the fact that investors get instant diversification, both through the multitude of companies wholly owned by Berkshire and through Berkshire’s large investment portfolio.

The foundation of the company is formed by the various property and casualty insurance holdings, led by Geico and General Re. Insurance accounted for about 40 percent of Berkshire’s operating profit last year, but this figure can fluctuate greatly from year to year. What Buffett has long valued about the insurance industry is the float, i.e. the money that insurance companies hold and that has not yet been paid out as compensation.

In fact, many property and casualty insurers are unprofitable in their underwriting because they have higher expenses and claim payouts than they earn in premium income. This ratio is called the combined ratio, and any value above 100% indicates that a company has been unprofitable in its insurance underwriting. Last year, the property and casualty insurance industry’s net combined ratio was 101.7%, which was actually an improvement from 102.5% the previous year.

However, insurance companies make most of their money by investing in their stocks. Most invest in high-grade bonds, but because Berkshire has one of the best investors ever, it uses its stocks to support its huge stock portfolio. However, Berkshire also makes an underwriting profit in most years. Last year, it made an impressive $5.4 billion.

In addition to its insurance and equity holdings, Berkshire owns and operates a number of companies in various sectors. One of the largest companies it owns is railroad company BNSF, which accounted for over 13% of its operating income last year and 19% in 2022. Berkshire has also built a nice portfolio in the energy transmission and utility sectors. In addition, it owns companies in manufacturing, retail, apparel, media, and construction.

Overall, Berkshire offers its investors a first-class managed insurance company with a unique investment strategy that sets it apart from all other companies in the world.

Image source: Getty Images.

Solid succession plan in place

What Buffett has created with Berkshire over the past decades is unique. But the Oracle of Omaha will not be around forever (he will celebrate his 94th birthday at the end of August).

Buffett cannot be replaced by a single person, so Berkshire will hand over his responsibilities to several people after his departure. Vice Chairman Ajit Jain will take over Berkshire’s insurance operations, while Greg Abel will be responsible for Berkshire’s non-insurance operations. Todd Combs and Ted Weschler have been under Buffett’s tutelage for the past decade and both managed a portion of Berkshire’s investment portfolio. However, Abel will be responsible for all capital allocation and investment decisions.

Buffett has given these individuals direct responsibility over the years as he has stepped back a bit, so there should be a relatively seamless transition after his death. While he will not be replaceable, he has created a unique, insurance-backed investment model that will endure long after he is gone.

A great core investment

Property and casualty insurance is typically valued based on the price-to-book (P/B) ratio, and by that yardstick, Berkshire stock is a bit expensive at 1.6. In the past, Buffett attempted to buy back Berkshire shares when they were priced below 1.1 times and later below 1.2 times P/B, though he later changed course because he felt that yardstick did not reflect the underlying value of Berkshire’s assets.

BRK.B Price-to-Book data from YCharts.

While Berkshire’s valuation may be a little high compared to its historical price by this metric, the stock has shown that it is a long-term winner whose business model continues to create value. Even with Buffett gone, I don’t see that changing.

Berkshire stock should continue to be a key investment for billionaires like Bill Gates as well as private investors.