Berkshire Hathaway, headed by Warren Buffett, an investing legend, has made significant investments in homebuilders recently. Berkshire Hathaway holds around $800 million in Lennar stock and $191 million in DR Horton stock, according to Realtor.com.
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After standard filings revealed Buffett’s growing interest in homebuilders, investors took notice. The news contributed to pushing stock prices higher for both DR Horton and Lennar in recent months, based on data from Yahoo!.
Buffett’s move put the spotlight on homebuilders and their potential as an investment opportunity. Explore possible reasons for this move in this guide.
Buffett Has the Long Term in Mind
Warren Buffett is famous for his value investing approach, which involves finding companies with undervalued stock that have significant potential for growth in the long term.
“For years, the U.S. has under-built, and estimates show we’re short by around 3 to 4 million homes nationally, and we’re still feeling that gap today,” said Austin Vanhove, chartered financial consultant (ChFC) and wealth advisor at Balefire. “There’s more demand than supply, and that doesn’t get solved overnight. By putting money into big builders like Lennar Corporation and D.R. Horton, Berkshire is betting on that long-term need for new homes.”
A severe housing shortage, documented by the U.S. Chamber of Commerce, makes it seem likely that demand for homebuilders will continue in force for years and possibly decades to come. If more houses are built to keep up with demand, then homebuilders will likely benefit.
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Berkshire Hathaway Remains Diversified
When you look at investments in homebuilding companies totaling close to $1 billion, it’s easy to think that Buffett is going all in on housing. But, in reality, Berkshire has maintained a diverse portfolio of stocks, even when buying such large quantities of homebuilder stocks.
Robert R. Johnson, PhD, chartered financial analyst (CFA), chartered alternative investment analyst (CAIA) and professor of finance at the Hieder College of Business at Creighton University, points out that, “While the total invested by Berkshire Hathaway into Lennar and D.R. Horton is over $1.1 billion, that represents only 0.4% of Berkshire Hathaway’s marketable securities portfolio and only 0.1% of Berkshire Hathaway’s total market capitalization. It represents a mere rounding error in Berkshire’s holdings.”
Should You Follow This Move?
As with Berkshire Hathaway, most savvy individual investors choose to invest with the long-term in mind. However, that doesn’t mean you necessarily need to go big with homebuilder stocks.
This move might be a signal worth paying attention to. After all, the demand for housing continues. But Buffett’s decision doesn’t need to dictate your entire investment strategy.
“For individual investors, it might make sense to look at the housing and construction space more strategically, whether that’s through homebuilder stocks, ETFs or companies tied to the building supply chain,” said Vanhove. “The key is to think long-term, not just react to the short-term noise in the headlines.”
Instead of jumping into this trend, take a look at your investment goals. For many investors, sticking with an index fund approach is an effective and simple strategy.
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This article originally appeared on GOBankingRates.com: Warren Buffett’s Berkshire Hathaway Is Betting Big on Homebuilders — Here’s Why
