What Does Berkshire Hathaway Do and How Does it Make Money?

Berkshire Hathaway’s 2020 Letter to Shareholders epitomised their ability to achieve prosperity during turbulent times. Guided by Warren Buffett’s impeccable business acumen, network and view of the economy, Berkshire Hathaway Energy earnings have grown over 2500%, from $122m to $3.4bn during Berkshire Hathaway’s 21 years of ownership.

I am going to discuss four key reasons why Berkshire Hathaway fosters longevity, and discuss the investment lessons we can learn from Buffett, a master of the real life Money Maze. These are as follows:

• Strategic Investment & Minimal Diversification
• Strong Leadership and Succession
• Responsible Philanthropy
• Navigating Geopolitics

Buffett once said that “Diversification makes little sense if you know what you are doing. It is protection against ignorance”. But to make such significant investments, which in this case could have systemic effect, one has to not only like the company’s prospects, but develop a thorough understanding of how the company works, and how it will achieve what it has set out to do.

85% of Berkshire’s invested assets lay with just 10 stocks, including Apple and Bank of America, which collectively accounts for 52% of their portfolio, at June 2021 prices. This enables Berkshire Hathaway to effectively influence each company’s leadership, playing a role of what is perhaps best described as activist investing.

WHAT IS BERKSHIRE HATHAWAY?Based in Omaha, Nebraska, Berkshire Hathaway is a multibillion dollar holding company run by Warren Buffett. It wholly owns a range of top US firms across multiple sectors (including Dairy Queen, GEICO and Duracell), and has significant minority interests in firms including Apple, Bank of America, Coca Cola, Kraft Heinz and American Express. In the 1960s the firm was a failing textile manufacturing business, until Buffett took control of the firm and transformed its fortunes through smart investment decisions (initially in the US insurance sector).

We can look to Berkshire Hathaway’s investment in Dairy Queen, an American fast food giant, to unravel how Buffett’s strategic investment of $585m has delivered financial prosperity. Buffett’s experience of Dairy Queen as a teenager led him to want to purchase the business. Coupled with picking up a Dairy Queen shift with Bill Gates, he built a deep understanding of Dairy Queen, its inner operations and how he could help grow the business. Dairy Queen delivers a reliable and constant revenue stream of approximately $2100m per year and benefits from minimal overheads due to their franchise model. They are a well-known, iconic American brand and this sits with Buffett’s values and motivations for developing a business.

Some investors may choose Berkshire Hathaway because of their five-year average debt-to equity ratio of 21.89%, which is 99% lower than the insurance sector, the high share price of 420.718.97 USD, which reflects the stock’s value, or perhaps their $55.7b operating income in 2020. But like Dairy Queen, Berkshire’s investments share the traits of the longevity, competent leadership and the iconic potential to become established and integral to people’s daily lives. The leadership Berkshire exercises across the 10 stocks which account for 85% of the portfolio epitomise the company’s approach to long-term and stable leadership, which will underpin their next chapter.

Buffett pledging more than 99% of his wealth to philanthropy is an excellent accolade to Berkshire Hathaway, having already given away just under half. Responsible philanthropy is an opportunity for businesses and individuals to engage with and gain the support of communities. Berkshire’s 16 annual contributions of their shares to five funds were worth $41b when disbursed. Benefiting foundations such as the Bill and Melinda Gates Foundation, the generosity and association will set Berkshire in good stead in what is a new era of philanthropic accountability.

China’s regulatory crackdown did not come as a shock. In a rapidly evolving geopolitical situation, with US-China tensions, climate change and the health situation in Latin America, businesses are reviewing their investments and the economic outlook, making critical decisions about where and when to invest. With an 8.2% stake in China’s leading electric car company BYD, and leading investments in companies such as Apple, Berkshire Hathaway are geographically cushioned. The deliberate choice of stocks can withstand the pitfalls of such an environment, and Berkshire Hathaway is “buying the same stocks because they’ll be good businesses 10 years from now”.

Perhaps the most important lesson is that activist investing requires passion and commitment. Investing in what is iconic, traditional and innovative is what drives Buffett. Our different investing approaches, whether aggressive, moderate or conservative, as well as where our passions and loyalties lay, is where we can exercise our commitment. By identifying robust and promising results, Buffett’s achieved success by committing to those stocks, or “putting all the eggs in one basket and watching it very carefully” (Jim Rogers).

By Joshua Hardy, a member of the Money Maze Brand Ambassador Programme. Josh is studying BSc Accounting and Finance at the University of Exeter and as an individual is strongly motivated by the world of business. He is a Governor at Great Ormond Street Hospital and is a member of the Membership Committee. Josh has extra-mural experience with JP Morgan, KPMG and XTX Markets.

Looking to join our brand ambassador programme? The next cycle runs from October 2021-March 2022. Find out more here.

‍

All content on the Money Maze Podcast is for your general information and use only and is not intended to address your particular requirements. Money Maze Podcast content, including this article, is funded by third party advertising only. We do however offer paid-for content on other shows in our network. Full disclaimer here.

‍