Warren Buffett has displayed an impressive ability to buy quality companies and hold on to their winners for the long haul. Since Buffett assumed the role as chief executive officer at Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) in 1965, the stock has returned investors nearly 20% annually. In other words, a $100 investment in the company when Buffett took over would be worth $2.4 million today!
Berkshire Hathaway has become one of the world's largest companies today, partly because of its significant investment portfolio and Buffett's stock-picking prowess. However, there are some things you may not know about the business. Here are three that the smartest investors know about Berkshire Hathaway.
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1. It's highly diversified across public and private businesses
The most recognizable part of Berkshire Hathaway is its $353 billion investment portfolio. Every quarter, investors review the company's 13-F regulatory filing to see which stocks it added to and removed from its portfolio. Apple is by far Berkshire's largest publicly held investment and makes up nearly 50% of its portfolio.
Berkshire also owns a wide array of closely held companies in industries such as insurance, railroads, energy, and manufacturing. These subsidiaries provide solid cash flows and have been a significant part of Berkshire's long-term success.
Some of its most significant acquisitions in the last couple of decades include Precision Castparts Corporation ($37 billion), BNSF Railway Company ($34 billion), and Alleghany Corporation ($11.6 billion).
2. Insurance investments play a crucial role in generating cash flow
When Buffett took over Berkshire Hathaway, it was a failing textile business with a bleak future. However, things changed in 1967 when it acquired National Indemnity. The acquisition shifted Berkshire away from textile operations to insurance and other businesses. Berkshire has expanded its insurance operations and owns GEICO, General Re, Berkshire Hathaway Reinsurance, and Alleghany.
Insurance investments are appealing due to their steady cash flows and their business model. Insurers receive premium payments upfront and pay claims later, which Buffett calls a "collect-now, pay-later" model. As a result, Berkshire Hathaway holds a large amount of cash, called float, which it can invest for its benefit. As policies and claims come and go, the amount of float remains relatively stable as long as an insurance company writes profitable policies.
Berkshire's float has grown significantly, from $19 million in 1957 to more than $164 billion, representing an 863,636% increase. Berkshire's insurance investments have been vital to the company's long-term success. Thanks to the consistent cash flows from these businesses, Berkshire consistently has a gigantic cash stockpile to invest as it sees fit.
Data source: Berkshire Hathaway. Chart by author.
3. It is sitting on a cash pile of $147 billion
Berkshire Hathaway has an enormous pile of cash on hand. Its float is an excellent source of money, and the company also earns billions of dollars in dividends annually from its stock holdings.
At the end of the second quarter, the conglomerate had over $147 billion in cash, cash equivalents, and short-term investments. This cash pile gives Berkshire the flexibility to acquire companies without needing additional financing. It also allows the company to capitalize on today's high-interest-rate environment by investing in short-term Treasury bills.
Investor takeaway
Berkshire Hathaway has a long track record of success under Buffett's leadership. Its diversified closely held investments provide consistent cash flows that help Berkshire grow its cash stockpile. These cash flows and Buffett's ability to identify and hold quality companies for the long haul have produced market-beating returns.
If you're looking for a resilient stock that can perform across market cycles, Berkshire Hathaway is an excellent choice.
