How Warren Buffett Borrows $77 Billion for Free

The details of a $77.2 billion interest-free loan to Warren Buffett's Berkshire Hathaway.

Mar 8, 2014 at 11:40AM


Source: HomeServicesAmerica

What makes Warren Buffett the greatest capitalist of all time?

A 2013 study discovered Warren Buffett is a great stock picker. But the "special sauce" in the Buffett formula is his use of leverage -- using borrowed money to make investments.

Multiplying your returns
Leverage can have tremendous impact on your investment returns. But unlike you and I, who would have to pay as much as 5-8% per year to borrow money, Buffett pays nothing.

Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) currently benefits from a $77.2 billion loan on which it pays zero percent interest.

Berkshire borrows this money from its customers -- its insurance customers. Each time customers make a payment on their insurance policies, Buffett gets to use the money until it is paid back out in claims. Between these time periods, Buffett enjoys the full use of interest-free financing and the investment returns that come from his investments.

The numerical value of free money
Over time, Warren Buffett's interest-free loans have only grown. Here is a chart of Berkshire Hathaway's insurance float since 1970:


When researchers from the National Bureau of Economic Research studied Buffett's insurance float, what they found was remarkable. Over the period from 1976-2011, Warren Buffett has borrowed countless billions of dollars at a rate that averaged 3.09 percentage points lower than the Treasury Bill rate. Buffett was borrowing money at a lower price than the U.S. Government!

At no point were these cheap loans tiny contributors to Berkshire's success. No, the insurance float equaled an average of 36% of all Berkshire borrowings from 1976-2011.

Getting paid to borrow money
In 21 of the 35 years under study, Berkshire Hathaway's insurance float had a negative cost. That is to say that in the majority of Berkshire Hathaway's history, it could have simply stuck its borrowed money under a mattress and earned a profit. This is true today -- in 2013, Berkshire Hathaway earned $3 billion just for "borrowing" $77.2 billion.

Warren Buffett's stockpicking skills are unmatched, but so is Berkshire's ability to generate billions of dollars in interest-free loans. Both contribute to what is the most impressive corporate track record in history. 

Learn from Buffett's best advice
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information