Introduction
Berkshire Hathaway stands as one of the world’s most successful and esteemed companies. Led by the legendary investor Warren Buffett, that was born in Omaha, Nebraska, United States of America. He studied in Columbia University.
The conglomerate owns and operates a diverse portfolio of businesses, ranging from insurance and utilities to railroads and candy. It also has a massive prefered stock in portfolio, consisting of some of the most valuable and influential companies in the world.
In this article, we will delve into the workings of Berkshire Hathaway, and learn about its business models, investment strategy, market impact, and culture.
Who Runs Berkshire Hathaway
Berkshire Hathaway purchased by Warren Buffet, it is run by a small and lean team of executives, who oversee the operations and capital allocation of the company.
The most prominent and influential members of this team are Warren Buffett and Charlie Munger, who have been working together for over six decades.
Warren Buffett’s Role
Warren Buffett is the chairman and CEO of Berkshire Hathaway, and the main decision-maker of the company. He is widely regarded as one of the greatest investors of all time, and has a net worth of over $100 billion.
He is responsible for selecting and buying the stocks and businesses that make up Berkshire Hathaway’s portfolio, and for setting the strategic direction and vision of the company.
He is also known for his simple and clear communication style, his frugal and humble lifestyle, and his philanthropic efforts.
Charlie Munger’s Contribution
Charlie Munger serves as the vice chairman of holding company Berkshire Hathaway and is Warren Buffett’s trusted confidant and close associate. He is also a billionaire investor, and a renowned thinker and philosopher.
He is the co-author of the famous Berkshire Hathaway annual letters to shareholders, and the mastermind behind many of the company’s acquisitions and investments. He is also known for his wit and wisdom, his multidisciplinary approach to problem-solving, and his advocacy of lifelong learning.
Inside Berkshire Hathaway: A Deep Dive into Business Models
Berkshire Hathaway is not a typical corporation, but rather a collection of dozens of independent and autonomous businesses, each with its own management and culture. These businesses can be broadly categorized into three segments: insurance, utilities and energy, and manufacturing, service and retailing.
Insurance Operations
Insurance is the core and the most profitable segment of Berkshire Hathaway. The company owns several insurance subsidiaries, such as GEICO, Berkshire Hathaway Reinsurance Group, Berkshire Hathaway Primary Group, and General Re.
These subsidiaries provide various types of insurance products, such as auto, property, casualty, life, and health. The insurance segment generates revenue from two sources: premiums and investment income. Premiums are the fees that customers pay to buy insurance policies, and investment income is the return that Berkshire Hathaway earns by investing the premiums in stocks, bonds, and other assets.
This is known as the “float”, which is the difference between the premiums collected and the claims paid. As of 2020, Berkshire Hathaway had a float of $138 billion, which is essentially an interest-free loan that the company can use to invest and grow its wealth.
Utilities and Energy
Utilities and energy is the second-largest segment of Berkshire Hathaway, and the most capital-intensive. The company owns several utilities and energy subsidiaries, such as Berkshire Hathaway Energy, PacifiCorp, MidAmerican Energy, NV Energy, and BHE Renewables.
These subsidiaries provide electricity, natural gas, water, and renewable energy to millions of customers across the US and abroad.
The utilities and energy segment generates revenue from the sale of energy and related services, and from the transmission and distribution of electricity and gas.
The utilities and energy segment is regulated by various federal and state agencies, which set the rates and terms of service for the customers. The segment also requires significant and continuous investments in infrastructure, maintenance, and expansion.
Manufacturing, Service and Retailing
Manufacturing, service and retailing is the most diverse and eclectic segment of Berkshire Hathaway, and the most exposed to the economic cycles.
The company owns and operates a wide range of businesses, such as BNSF Railway, Lubrizol, Marmon, Clayton Homes, Duracell, Dairy Queen, See’s Candies, Fruit of the Loom, and many more.
These businesses produce and sell various products and services, such as transportation, chemicals, industrial products, building materials, consumer goods, food, and entertainment. The manufacturing, service and retailing segment generates revenue from the sale of goods and services, and from the royalties and fees from franchising and licensing.
How Berkshire Hathaway Makes Money
Berkshire Hathaway makes money from two main sources: investment income and operating business earnings.
Investment income is the return that the company earns from its stock portfolio, which consists of shares of some of the most valuable and influential companies in the world, including Apple, Coca-Cola, Bank of America, American Express, and numerous others.
As of 2020, Berkshire Hathaway’s stock portfolio was worth $281 billion, and generated $8.9 billion in dividends.
Operating business earnings are the profits that the company makes from its own businesses, which are mostly in the insurance, utilities and energy, and manufacturing, service and retailing segments. As of 2020, Berkshire Hathaway’s operating businesses earned $21.9 billion in pre-tax earnings.
Inside Berkshire Hathaway: A Deep Dive into Investment Strategy
Berkshire Hathaway’s investment strategy is based on the principles of value investing, which is the philosophy of buying high-quality businesses at a discount to their intrinsic value, and holding them for the long term. The company follows a disciplined and patient approach to investing, and seeks to acquire businesses that have the following characteristics:
- A durable competitive advantage, which is the ability to maintain and grow market capitalization share and profitability over time, despite competition and changing consumer preferences.
- A strong and trustworthy management team, which is capable of running the business efficiently and effectively, and aligning their interests with those of the shareholders.
- A consistent and growing cash flow, which is the amount of money that the business generates after paying all its expenses and investing in its growth.
- A reasonable valuation, which is the price that the market is willing to pay for the business, relative to its earnings, assets, and growth potential.
Berkshire Hathaway’s investment strategy can be divided into two types: stock investments and business acquisitions.
Stock Portfolio Highlights
Berkshire Hathaway’s stock portfolio is composed of shares of publicly traded companies, which the company buys and sells in the stock market. The company typically invests in large and well-established companies, which have a dominant position in their industries, and a proven track record of profitability and growth. Some of the highlights of Berkshire Hathaway’s stock portfolio are:
- Apple: Berkshire Hathaway’s largest and most valuable stock holding, worth $120 billion as of 2020. The company owns 5.4% of Apple’s shares, and considers it as one of its best businesses. Apple is the world’s leading technology company, known for its innovative products and services, such as the iPhone, iPad, Mac, Apple Watch, AirPods, Apple Music, Apple TV, and more. Apple has a loyal and growing customer base, a strong brand, and a high-margin business model.
- Coca-Cola: Berkshire Hathaway’s longest and most consistent stock holding, dating back to 1988. The company owns 9.3% of Coca-Cola’s shares, worth $22 billion as of 2020. Coca-Cola is the world’s leading beverage company, known for its iconic products and brands, such as Coca-Cola, Sprite, Fanta, Minute Maid, Dasani, and more. Coca-Cola has a global distribution network, a diversified portfolio, and a stable and growing cash flow.
- Bank of America: Berkshire Hathaway’s second-largest and most recent stock holding, worth $31 billion as of 2020. The company owns 11.9% of Bank of America’s shares, and has the option to increase its stake to 24.9%. Bank of America is one of the largest and most diversified financial institutions in the US, offering various products and services, such as banking, lending, investing, and wealth management. Bank of America has a strong balance sheet, a large customer base, and a low-cost deposit base.
Acquisition Philosophy
Berkshire Hathaway’s acquisition philosophy is to buy entire businesses, rather than shares of businesses, and to keep them forever, rather than sell them. The company prefers to acquire businesses that are in the same or related industries as its existing businesses, or that can complement or enhance its existing businesses. The company also prefers to acquire businesses that are privately owned, rather than publicly traded, as they tend to be less expensive and less competitive. Some of the examples of Berkshire Hathaway’s acquisitions are:
- – BNSF Railway: Berkshire Hathaway’s largest and most strategic acquisition, worth $44 billion in 2009. The company owns 100% of BNSF Railway, which is one of the largest and most efficient railroads in North America, transporting various commodities, such as coal, agricultural products, consumer goods, and industrial products. BNSF Railway has a vast and well-maintained network, a loyal and diversified customer base, and a competitive advantage over other modes of transportation.
- Lubrizol: Berkshire Hathaway’s most synergistic acquisition, worth $9 billion in 2011. The company owns 100% of Lubrizol, which is one of the world’s leading specialty chemical companies, producing and supplying various products, such as lubricants, additives, polymers, and coatings. Lubrizol has a strong and innovative R&D capability, a global and diversified customer base, and a high-margin business model. Lubrizol also benefits from Berkshire Hathaway’s insurance and energy businesses, as it provides products and services that enhance their performance and efficiency.
- Precision Castparts: Berkshire Hathaway’s most expensive and most recent acquisition, worth $37 billion in 2016. The company owns 100% of Precision Castparts, which is one of the world’s leading manufacturers of complex metal components and products, serving various industries, such as aerospace, power, oil and gas, and industrial. Precision Castparts has a dominant and niche position in its markets, a long-term and stable relationship with its customers, and a high-quality and low-cost production capability.
Berkshire Hathaway’s Influence on Markets
Berkshire Hathaway’s influence on markets is immense and multifaceted. The company affects the markets in several ways, such as:
- Stock Market Impact: Berkshire Hathaway’s stock portfolio is one of the most watched and followed by investors, analysts, and media.
- The company’s buying and selling decisions can have a significant impact on the stock prices and valuations of the companies it invests in, as well as the overall market sentiment and direction.
- The company’s annual reporting meeting, also known as the “Woodstock of Capitalism”, is one of the most anticipated and attended events in the financial world, where Warren Buffett and Charlie Munger share their insights and wisdom on investing, business, and life.
- The Culture at Berkshire Hathaway: Berkshire Hathaway’s culture is one of the most admired and emulated in the corporate world. The company’s culture is based on the values of integrity, trust, autonomy, and excellence. The company treats its shareholders, employees, customers, and partners with respect and fairness, and expects the same from them. The company also fosters a culture of learning, innovation, and philanthropy, and encourages its stakeholders to pursue their passions and interests.
What the Future Holds for Berkshire Hathaway
Berkshire Hathaway’s future is uncertain and unpredictable, as the company faces various challenges and opportunities in the changing and competitive environment. Some of the factors that may affect the company’s future are:
- The Succession Plan: One of the biggest questions and concerns for Berkshire Hathaway’s shareholders and fans is who will succeed Warren Buffett and Charlie Munger as the leaders of the company. Both Buffett and Munger are in their 90s, and have not publicly announced their successors.
- However, they have hinted that they have a plan in place, and have delegated more responsibilities and authority to their lieutenants, such as Ajit Jain, Greg Abel, Todd Combs, and Ted Weschler. These executives are expected to continue the legacy and philosophy of Buffett and Munger, and to maintain the culture and performance of the company.
- The Growth Potential: Another challenge for Berkshire Hathaway is how to sustain and increase its growth rate, as the company becomes larger and more mature.
- The company’s size and reputation make it harder to find attractive and undervalued investment opportunities, and to generate high returns on its capital. The company also faces increased competition and disruption from new and emerging technologies, industries, and business models. The company may need to adapt and innovate its strategy and portfolio, and to explore new and uncharted territories, such as international markets, digital platforms, and environmental, social, and governance (ESG) issues.
- The Shareholder Value: A final factor that may influence Berkshire Hathaway’s future is how to create and deliver value to its shareholders, who have been loyal and supportive of the company for decades.
- The company has historically avoided paying dividends or buying back its shares, preferring to reinvest its earnings and cash in its businesses and investments. However, in recent years, the company has accumulated a large and growing cash pile, which reached $146 billion as of 2020. The company has also started to repurchase its shares, spending $24.7 billion in 2020. The company may need to reconsider its capital allocation and distribution policy, and to balance its long-term and short-term objectives, and its growth and value creation.
Conclusion: Final Thoughts
Berkshire Hathaway is a remarkable and unique company, that has achieved extraordinary success and admiration under the leadership and vision of Warren Buffett and Charlie Munger.
The company owns and operates a diverse and profitable portfolio of businesses and investments, that have a strong and durable competitive advantage, a loyal and satisfied customer base, and a consistent and growing cash flow.
The company also has a distinctive and admirable culture, that is based on the values of integrity, trust, autonomy, and excellence, and that fosters a spirit of learning, innovation, and philanthropy.
The company faces an uncertain and challenging future, as it deals with various issues, such as the succession plan, the growth potential, and the shareholder value.
However, the company has a solid and proven track record, a talented and capable team, and a loyal and supportive fan base, that give it the confidence and the resilience to overcome any obstacles and to seize any opportunities.
Berkshire Hathaway is a company that deserves respect and admiration, and that offers valuable lessons and insights for investors, businesspeople, and anyone who wants to learn from the best.
FAQ
- What is Berkshire Hathaway?Berkshire Hathaway is a conglomerate that owns and operates a diverse portfolio of businesses and investments, led by the legendary investor Warren Buffett.
- What are some of the businesses and investments that Berkshire Hathaway owns?Some of the businesses and investments that Berkshire Hathaway owns are GEICO, BNSF Railway, Lubrizol, Precision Castparts, Apple, Coca-Cola, Bank of America, and many more.
- How does Berkshire Hathaway make money?Berkshire Hathaway makes money from two main sources: investment income and operating business earnings. Investment income is the return that the company earns from its stock portfolio, and operating business earnings are the profits that the company makes from its own businesses.
- What is Berkshire Hathaway’s investment strategy?Berkshire Hathaway’s investment strategy is based on the principles of value investing, which is the philosophy of buying high-quality businesses at a discount to their intrinsic value, and holding them for the long term.
- What are some of the challenges and opportunities that Berkshire Hathaway faces in the future?Some of the challenges and opportunities that Berkshire Hathaway faces in the future are the succession plan, the growth potential, and the shareholder value.