Berkshire Hathaway

"It’s why, to avoid lapsing into the shared-language and shared-thinking of bankers, Warren Buffett writes Berkshire Hathaway annual reports as though addressing his sister Bertie."

"Two Interesting Patterns For those interested in a deeper dive into Buffett’s stock market investing, two other patterns are worthy of notice. The first is a deep-rooted contrarianism. Buffett has frequently cited Benjamin Graham’s “Mr. Market” analogy, in which “an obliging fellow named ‘Mr. Market’ shows up every day to either buy from you or sell to you . . . the more manic-depressive this chap is, the greater the opportunities available to the investor.”a Buffett systematically buys when Graham’s Mr. Market is feeling most blue. The majority of Berkshire’s major public market investments originated in some sort of industry or company crisis that obscured the value of a strong underlying business. The following table demonstrates this pattern. The second pattern is timing investments to coincide with significant management or strategy changes. Buffett uses the analogy of a pro-am golf event to describe these investment opportunities, which arise when a company with an excellent “franchise-type” business invests in other businesses with lower returns: “Even if all of the amateurs are hopeless duffers, the team’s best-ball score will be respectable because of the dominating skills of the professional.”b When, however, Buffett sees that a new management team is removing the amateurs from the foursome and returning focus to the company’s core businesses, he pays close attention, as the preceding table demonstrates. a. Berkshire Hathaway annual reports, 1977–2011. b. Berkshire Hathaway annual reports, 1989."

"See’s: The Turning Point A pivotal investment in Buffett’s shift in investment focus from “cigar butts” to “franchises” was the acquisition in 1972 of See’s Candies. Buffett and Munger bought See’s for $25 million. At the time, the company had $7 million in tangible book value and $4.2 million in pretax profits, so they were paying a seemingly exorbitant multiple of over three times book value (but only six times pretax income). See’s was expensive by Graham’s standards, and he would never have touched it. Buffett and Munger, however, saw a beloved brand with excellent returns on capital and untapped pricing power, and they immediately installed a new CEO, Chuck Huggins, to take advantage of this opportunity. See’s has experienced relatively little unit growth since it was acquired, but due to the power of its brand, it has been able to consistently raise prices, resulting in an extraordinary 32 percent compound return on Berkshire’s investment over its first twenty-seven years. (After 1999, See’s results were no longer reported separately.) During the last thirty-nine years, the company has sent $1.65 billion in free cash to Omaha on an original investment of $25 million. This cash has been redeployed with great skill by Buffett, and See’s has been a critical building block in Berkshire’s success. (Interestingly, purchase price played a relatively minor role in generating these returns: had Buffett and Munger paid twice the price, the return would still have been a very attractive 21 percent.)"

"When one reads that “Warren Buffett” has bought, [for example], an interest in General Foods, it usually means that an insurance subsidiary of Berkshire Hathaway—using its reserves built up against future claims—has made the investment, which can cost more than Berkshire Hathaway, the parent company, could readily afford. . . .The same maneuver, using insurance companies, is per¬ formed by such operators as Henry Singleton, Larry Tisch, Carl Lindner and Saul Steinberg, among others.63"

"In 1989, Buffett’s investment vehicle, Berkshire Hathaway, invested in US Air through a specially designed convertible preferred stock. The airline was attempting to create a nationwide route system connecting midsized cities, but investors were not yet convinced that the strategy would succeed. Almost as soon as Buffett bought the stock, a fare war erupted. The following year, air travel plummeted in response to the out¬ break of the Persian Gulf War. With the benefit of hindsight, the previously cheap valuation of USAir began to look like awareness that if revenues fell, the airline would be hammered by its high employee costs. Over the next few years, US Air racked up $3 billion in losses. The carrier also suspended the dividend on Berkshire Hathaway’s convertible"

"Buffett built a vast industrial and financial empire on the founda¬ tion of a struggling textile company. On May 10, 1965, the day he gained control, Berkshire Hathaway’s closing share price was $ 18. The stock ended 1998 at $70,000 a share. (One of many conventional ideas that Buffett rejects is stock splits. “I’ve never really felt,” he explains, “that if I went into a restaurant and said, ‘I want two hatchecks instead of one for my hat’ I’d really be a lot better off.”)52 Massive wealth has rained down on Buffett’s early investors, as well as entrepreneurs who sold him their companies for stock. Forbes has estimated that there are scores of families that own $100 million or more of Berkshire Hathaway shares.53"

"Consider, for example, a company capitalized with $200 million and generating $800 million of annual premiums. If the insurer earns 6 percent on the result¬ ing investment portfolio of $1 billion, or $60 million, its return on invest¬ ment (before expenses and taxes) is $60 million over $200 million, or 30 percent. This leverage is particularly powerful in Berkshire Hathaway’s case. Typically, bonds represent the bulk of an insurance company portfo¬ lio, but Buffett has emphasized equities, which produce higher rates of re¬ turn over time. Further magnifying the power of leveraging Berkshire Hathaway’s portfolio are Warren Buffett’s exceptionally high investment returns."

"The financial leverage inherent in these subsidiaries produced a staggeringly high compounded growth rate in Berkshire Hathaway’s secu¬ rities portfolio. Leverage also proved invaluable whenever Buffett spotted an attractive opportunity to acquire a company whole, notwithstanding the control premium62 ordinarily associated with such transactions. The purchasing power of Berkshire Hathaway’s equity was multiplied by the availability of insurance reserves several times as great. (Buffett also built up the company’s investment portfolio by investing the “float” repre¬ sented by funds earmarked for future redemption of Blue Chip trading stamps.)"

"Our final advantage is the hard-to-duplicate culture that permeates Berkshire. And in businesses, culture counts. —Warren Buffett, 2010 Berkshire Hathaway"

"On September 29, 2008, Buffett's investment flagship Berkshire Hathaway announced that its subsidiary MidAmerican Energy had signed a strategic investment and share subscription agreement with BYD. According to the agreement, Buffett would purchase 225 million shares of BYD at HK$8 per share, approximately 10% of BYD's shares after the offering. This was Buffett's first long-term strategic investment in a Chinese private enterprise, and he also became BYD's largest overseas shareholder. Amidst a global financial turmoil and the continuous shrinkage of equity investments, the "Stock God" Buffett chose to invest in BYD, the deep implications of which are worth pondering."

"Take Addtech as an example: each business area is incentivized to grow—both organically and through acquisitions—but must also compete for internal capital. Similarly to Warren Buffett at Berkshire Hathaway, the CEO Niklas Stenberg acts as the overarching capital allocator, ensuring that the capital flows to the highest-return opportunities. This pushes business areas to sharpen their cases, only presenting their best opportunities."

"Over the next two years, Liberty Media would release more shares to increase liquidity and make it more affordable, splitting Liberty stock 20-for-1, then 4-for-1, and then 2-for-1. Our theory of making money was similar to Berkshire Hathaway—a portfolio of companies run by a lively mix of driven and dedicated entrepreneurs."

"Buffett in Berkshire Hathaway Letters to Shareholders, 1965–2013. Another marvelous glimpse inside the mind of a master is Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger,"