You know a little something about Warren Buffett. You've seen his wise quotes, you know him as one of the greatest investors of our time, maybe you've even read some excerpts from his annual letters to Berkshire Hathaway
But does knowing about Warren Buffett mean that you know about Berkshire Hathaway? Not necessarily. So in the spirit of The Motley Fool's upcoming Worldwide Invest Better Day, let's take a look at a few things that investors should know about the mighty Berkshire Hathaway.
1. Berkshire: What it is and what it isn't
It may be easy to assume that Berkshire is little more than Warren Buffett's investment vehicle, and that the success or failure of the enterprise rests solely with him. There was a time when that was more or less the case. Today, however, it's not an accurate view of the company. Here's a look at where Berkshire's earnings come from:
|Segment||2011 Net Earnings|
|Manufacturing, Service, and Retail||$3 billion|
|Utilities and Energy||$1.2 billion|
Source: Berkshire Hathaway annual report.
Buffett played a prominent role in putting this conglomerate together as the acquisitions that Berkshire has made over the years were largely his call. Where does he come in today, though? Primarily through the new acquisitions that Berkshire makes as well as the insurance segment. Berkshire's underwriting profit for its insurance arm was poor in 2011, but even in a "normal" year, the investment income that it derives from investing insurance premiums constitutes the bulk of the earnings in that business. And it should be no surprise that it's Buffett himself that's making most of the major investing decisions there.
Outside of the insurance business, though, Buffett has little to do with the day-to-day operations. The brilliance of Buffett over the years has been to buy companies with management that he trusts. Doing that has allowed him to focus on what he does best -- allocating capital and investing -- rather than on trying to tinker with management decisions at individual subsidiaries.
So today, Berkshire is much less a play on Warren Buffett and his investing prowess and much more a multi-industry conglomerate whose success lies with the quality of the individual businesses and the state of the overall economy.
2. No dividend? No problem.
Berkshire Hathaway does not pay a dividend. For many investors, that's considered no bueno as they -- for good reasons -- prefer companies that pay out a reasonable chunk of their profits to investors. But passing on Berkshire simply because it doesn't pay a dividend could be a big mistake.
The reason for this is that dividends are a great way for managers to return capital to shareholders rather than using it in wasteful ways like ill-conceived projects, overpriced acquisitions, or poorly timed buybacks. The ability of Warren Buffett to take the profits earned by the Berkshire companies and put them toward the best opportunities is the primary reason Berkshire investors benefit from having Buffett at the helm. If Berkshire paid a dividend, it would take the company's capital and put it in your hands to reallocate rather than Warren Buffett's. Is that really what you'd want?
As we look out into the future, eventually Buffett will no longer be managing Berkshire. At that point, this question may need to be revisited. Buffett and the Berkshire board have taken pains to put together a succession plan in preparation for the day that Buffett departs, but he'll be a tough guy to replace. If Buffett's replacement(s) can't prove they're as successful as capital allocators, then investors may be right to demand a dividend down the road. But that day isn't today.
3. It's not just Buffett
Yes, we can all concede that if Warren Buffett were no longer at Berkshire, it would be a big loss. Buffett's right-hand man Charlie Munger may be a slightly lesser-known name, but in most investing circles, his name would also quickly come up as a big loss were he to exit Berkshire.
But since identifying quality people is very important to Buffett, the key players at Berkshire go much deeper than just Warren and Charlie. And while having a deep bench of smart, trustworthy people is a great benefit, it's also a potential risk if any of them were to jump ship.
If you're not intimately familiar with Berkshire, the names Ajit Jain and Tony Nicely may not ring any bells. However, Jain is the brains behind Berkshire's highly specialized, big-money insurance and reinsurance operations, while Nicely has been running the Berkshire auto insurer GEICO for going on two decades. Nicely was a key reason why Buffett opted to buy all of GEICO in the first place, while of Jain, Buffett's said that he's "probably made a lot more money for Berkshire than I have." The loss of either Jain or Nicely could be particularly painful for Berkshire, and the two of them just scratch the surface.
When you drill down to look at the component Berkshire companies, many of them are simply great, product-driven businesses. After all, Buffett's said that he likes companies that could be run by a ham sandwich. That said, if you want to understand Berkshire's success, it's also important to understand who the key people are, and what the risks are if they end up out of the picture.
Learn more, Buffett would approve
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Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.