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

Much is said about Warren Buffett and Berkshire Hathaway, but it turns out too much of the attention is put in the wrong direction.

Jul 30, 2014 at 12:06PM

G

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 Insider Monkey

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:

Images
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.

Patrick Morris owns shares of Berkshire Hathaway. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers