Many investors know Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) as "Warren Buffett's company," but they aren't sure exactly how it makes money. And the answer is a bit complicated, as Berkshire is a collection of subsidiary businesses and a massive stock portfolio.

In this Industry Focus: Financials clip, host Shannon Jones and Fool.com contributor Matt Frankel give a quick rundown of Berkshire's business model.

A full transcript follows the video.

This video was recorded on Aug. 6, 2018.

Shannon Jones: Before we dive into the latest on Berkshire, Matt, let's actually catch our listeners up on what exactly Berkshire does, and more importantly, how in the world is it so awesome at making money?

Matt Frankel: First of all, a lot of people don't think of Berkshire as a financials sector company, but in reality, it's the largest financials sector company. The reason for it is, at its core, Berkshire is an insurance company. Warren Buffett loves the insurance business. He started buying up insurance companies shortly after he took the reins of Berkshire Hathaway -- which, at the time, was a textile manufacturer. It owns insurance subsidiaries. Geico is probably the most well-known one. Gen Re, a reinsurance company, is the biggest of their insurance subsidiaries. That's why we include it in the financials sector -- at its core, it's an insurance business.

It also owns a collection of other subsidiary companies, about five dozen of them, ranging in all kinds of industries, from consumer goods to housing to automotive parts. Just to mention a few of the commonly known ones: Dairy Queen is a Berkshire subsidiary; BNSF Railroad is a subsidiary; NetJets, the private jet leasing company, is a subsidiary; Duracell; Fruit of the Loom; I could go on. Berkshire has this big collection of businesses which all generate cash flow for the company. Because it has all of these businesses, they can use their money wherever they see fit to grow each business as necessary.

In addition to that, Berkshire has a big, big stock portfolio that's very closely followed. Warren Buffett views this as a big competitive advantage, that Berkshire is willing to invest money in companies that it doesn't control. A lot of big insurance companies are not willing to do that. Berkshire's stock portfolio is worth over $200 billion as I'm speaking.

While he has about four dozen companies in his portfolio, there are six that are really the big standouts. There's Apple, American Express, Wells Fargo, Bank of America, and Coca-Cola. Between the five of them are about 70% of the stock portfolio value. Berkshire also has a big stake in Kraft Heinz, more than a quarter of the company. That's accounted for under a slightly different method, so it's not technically included in the stock portfolio, but it's worth about $20 billion. It's a pretty big holding. And, as Shannon mentioned, Berkshire also has a lot of cash that adds value to the company, which we'll get into a little more later.

Jones: Matt, you mentioned, at its core, Berkshire Hathaway is an insurance business. Generally speaking, there are two ways insurers make their money. They write a policy, you pay a premium, and they pay you if you get into an accident. Granted, money is definitely lost on that side of the business, especially when there are a lot of claims. Think about last year's devastating hurricane season, which certainly had an impact on Berkshire Hathaway. We'll talk a little bit about that in a moment. But, they make up that money when it comes to their investments.

Matt, as you went down, Berkshire is most well-known for its investment portfolio. All of those companies, including Apple -- which, by the way, became the first trillion-dollar company by market cap last week. Our own Dylan Lewis did an Industry Focus episode last Friday, August 3rd, on that topic and what it means. I certainly encourage you to check it out. But, really, when it comes to Berkshire Hathaway, all eyes generally tend to be on what's in its portfolio, what's it investing in, and the like.

Matthew Frankel owns shares of American Express, Apple, Bank of America, and Berkshire Hathaway (B shares). Shannon Jones has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.