1 Thing Warren Buffett Wants You to Know About Berkshire Hathaway Inc.

Much is said about the stocks Warren Buffett buys through Berkshire Hathaway, but for people interested in buying a stake in his company, those investments are beginning to matter less and less. 

What Warren Buffett wants you to know

Every year, Berkshire Hathaway releases its Annual Report, which includes Buffett's well-known letters -- not to mention the results of the company -- and also sections that are repeated each and every year. For example, a 1996 booklet Buffett wrote called An Owner's Manual has been included in each year since then. You'll also see the six things Buffett requires of any business Berkshire Hathaway would acquire.

But one of the most fascinating things is the recent addition of the section from the 2010 Letter to Shareholders titled "Intrinsic Value -- Today and Tomorrow."

Although it may be recent, it's clearly something Buffett wants to ensure individuals see, as it has been included the last three years. And there's no indication it'll stop anytime soon.

Warren Buffett. Source: Insidermonkey.com

Buffett's main focus

The section details exactly how Buffett and Charlie Munger -- the longtime vice chairman of Berkshire -- gauge the true value of Berkshire Hathaway. The first thing noted is the value of the investments in stocks, bonds, as well as cash equivalents held by Berkshire.

These investment are primarily related to Berkshire Hathaway's insurance operations and its float -- the difference between what it has taken in through premiums versus what it will eventually pay out.

At last count, that float stood at more than $77 billion. While Berkshire expects to pay out a portion of this money Berkshire in the form of insurance claims, in the meantime, the money can be invested by Buffett and his team.

Buffett's second point was to highlight that Berkshire Hathaway also has a stable of noninsurance businesses, including Burlington Northern Santa Fe, Berkshire Hathaway Energy, Lubrizol, Marmon and many, many more.

Even thought he mentioned the stocks first, those investment portfolio are clearly not his main focus:

In Berkshire's early years, we focused on the investment side. During the past two decades, however, we've increasingly emphasized the development of earnings from non-insurance businesses, a practice that will continue.

As a result, Buffett shows the power example of the difference between the relative growth of the investments of Berkshire Hathaway versus the earnings provided by its noninsurance businesses:


Source: Company Investor Relations and author calculations 

In fact, from 1990 to 2013, the per-share earnings from its noninsurance businesses have grown at an average annual rate of 21.5%, whereas its investments have grown at 13%.

And as you can see, that staggering difference resulted in the earnings of the non-insurance businesses standing nearly 90 times higher today than in 1990, versus "just" a 16 times greater value in its investments.

The key takeaway

For good reason, what stocks Buffett and Berkshire Hathaway are buying is worth watching, if you are considering buying shares of Berkshire Hathaway itself, the stock portfolio is starting to matter less and less to the company's true value.


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  • Report this Comment On July 30, 2014, at 1:04 PM, EquityBull wrote:

    Good article. I didn't even realize the lack of emphasis today on Buffett's stock picks as a percentage of the whole business. I'll bet 99% of the investing public doesn't realize this. Amazing.

    Thanks.

  • Report this Comment On August 12, 2014, at 3:27 PM, petermarconi wrote:

    Hi Patrick,

    I really enjoy your articles covering Berkshire Hathaway. I'm an intern giving a presentation next week to my firm's investment committee, and I decided to make a pitch for Berkshire Hathaway class B shares to be added to client portfolios. Would you mind if I used these numbers in my presentation? I don't think most of the public realizes how little the company's investments affect its bottom line.

    Thanks!

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