Berkshire Hathaway
Hurricane Synergy

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By rclosch
August 31, 2006

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Thanks to goodnessgracious for his list of USG purchases. For anyone that missed his list here is a review.

Prior to the offering Berkshire owned 6.5 million shares. On the day) of the offering, July 28, Berkshire was able to purchase an additional 6,969,274 shares. Since then Berkshire has continued to buy stock in the open market.

Date Number of Shares Average Price

August 2, 2006 692,500 shares. $45.46
August 3, 2006 26,900 shares $45.71.
August 7, 2006 82,900 shares $45.80.
August 8, 2006 1200 shares $45.81.
August 9, 2006 587,100 shares $45.98.
August 10, 2006 118,500 shares $46.01.
August 11, 2006 23,500 shares $46.03.
August 21, 2006 567,218 shares $45.92.
August 22, 2006 390,200 shares $45.97.
August 23, 2006 734,700 shares $45.90.
August 24, 2006 7000 shares $46.03

Since the 24th and during the period from August 11th to the 21st USG has been trading well above $46, and there has been no additional buying. With 89.9 million shares outstanding Berkshire now owns 18.6% of the company. My guess is that if the stock does trade back down to below $46 Berkshire will buy more stock. I think Warren will buy as much as he can get at his price. In fact, I strongly suspect that he would love to buy the whole thing. USG fits very nicely into Berkshire's building material, companies.

This I suspect is part of what we will call Buffett's hurricane synergy, the idea that if Berkshire can buy enough companies in the building materials, construction, and a manufactured housing industries. Then, when its the insurance companies are paying insurance claims for catastrophic damage due to hurricanes and earthquakes, Berkshire as a company will just be transferring money from one pocket to another. We have no way of knowing if this is what Buffett has in mind, but it is hard for me to think of a company that fits this pattern better than one that makes wallboard and ceiling tile.

The Hurricane as a "Wash"

This is the list (so far) of Berkshire subsidiaries that may receive some revenue from construction, disaster recovery, reconstruction, redecoration and repair.

Acme Building Brands.
Benjamin Moore.
Campbell Hausfeld.
Carefree of Colorado
Clayton Homes, Inc.
Cleveland Wood Products.
Court Business Services.
Forest River, Inc.
John's Manville.
Jordan's Furniture.
Larson Juhl.
MiTek Inc.
Nebraska Furniture Mart
Precision Steel
Shaw Industries
Star Furniture.
Wayne Water Systems.
R.C. Willey Home Furnishings

I do not know if it is theoretically possible for Berkshire to buy enough construction related businesses so that a hurricane, as far as Berkshire is concerned, would become a wash (they take in as much from reconstruction as much as they payout in insurance claims). It may not be possible, and certainly we have a long way to go, but it is an interesting idea. For a company whose culture is founded on moat building this would be an architectural masterpiece. Can you imagine the position of other reinsures trying to compete with a company that had nothing to loose from paying losses.

It is true that the law of large numbers is working against Berkshire in many areas, but in the CAT business, it may well be that, the bigger you are, the deeper your moat. This is just a part of the pattern we see where Buffett is moving away from areas where size is an anchor, and into businesses were size makes you stronger.

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