Business Strategy: Berkshire Hathaway
Business Strategy: Berkshire Hathaway
Intrinsic value in business or a stock is all the amount of money that the business can make from the present to a future date when it is wound up, discounted at the appropriate discounting rate. The essence of investment lies in outlaying small amounts in the present with the aim of earning larger sums in the future. An investor, therefore, has to have an idea of the future earnings possible from the investment sought in order to understand the intrinsic value of the stock intended for purchase.
Buffet insists on investing in stocks that are easy to understand. In this respect, the company he intends to invest must have a consistent operating history, good long-term prospects following from some competitive advantages. Additionally, the business should possess a quality management team, as well as command a strong financial position. Further, growth must reflect on equity, but more long-term growth than the short term is desirable in a company.
Buffet’s consideration of people he would consider as successful is not influenced by the intrinsic abilities held by the individual, but rather, in addition to talent, hard work and self-drive. These qualities are self-made and include honesty, generosity, and a willingness to do more than their share. The three characters that Buffet looks for are intelligence, energetic and integrity, with integrity being crucial among the three.
While Warren Buffet might be the most avid investor of all time, he comes across as a calm and content person with his current position. While his wealth has come because of a lifetime of hard work, it also reflects in his investment strategy, where he does not rush to make a quick profit but chooses his investments wisely aimed at making a longer-term gain. In my opinion, a long-term approach to life and business is a major factor in Warren Buffet’s success.
If one had invested $100 in Berkshire Inc. on Jan 1965, then the value of their investment would have risen grown relative to the percentage change in the book value of the company from 1965 to 2014. The compounded annual gain that Berkshire has enjoyed over these years is to the tune of 19.4% . Present value = Principal amount * (1+ r/n)^nt
n= number of times the interest is compounded per year
t=number of years
100(1+0.194/1)^50
100(7082.99) = $ 708298.50
Berkshire Inc. operates insurance businesses as its main source of revenue, and Buffet explains the several factors that make insurance an attractive insurance option. The money deposited as premiums provides the company with ‘float’ or a pool of funds that does not belong to them, but which they can invest for Berkshire’s gain. Further, the company’s insurance interests are diversified, covering different market niches thus spreading the risk .
According to Warren buffet, a sound insurance operation needs to adhere to four disciplines as follows:
Understand all factors exposing a policy loss making situations
Conservative assessment of the probability of any disclosure causing loss, and the possible cost if the exposure causes a loss
Set premiums that return a profit on regularly after the deduction of both potential loss costs and the working expenditures.
Have the disposition to refuse a deal if the client does not meet the required premium
Berkshire Hathaway Inc. has interests in a multitude of companies in which it does not hold the controlling stake. However, careful selection is done when making a determination of the companies that Berkshire invests. Among the blue chip companies in which the company invests, include Visa Inc., Wells Fargo and Co, Wal-Mart Stores Inc., Goldman Sachs, Johnson and Johnson, General Electric, John Deere among others. Warren sticks to his advice on buying stocks that area uncomplicated, and easy to understand. In this relation, his portfolio comprises of companies that promise consistent growth into the future, and I would advise anyone to invest in a similar portfolio if they are looking for long-term growth.
References
Buffett, W., & Munger, C. (2014). BerkShire Hathaway Annual Report (2014). Nebraska: Berkshire Hathaway Inc.
Calandro, J. (2011). The Margin of Safety Principle and Corporate Strategy. Strategy & Leadership, 39(5) 38-45.
