On the back of yesterday's drop, U.S. stocks opened higher this morning, with the S&P 500 (^GSPC 1.42%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI) gaining 0.44% and 0.39%, respectively, at 10:10 a.m. EDT.
Berkshire: Going abroad pays off
If I had a dollar for every comment asserting at the end of a Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.99%) article that CEO Warren Buffett has lost his touch, I'd have a small fortune myself. Those opinions are an affront to reality when there is so much evidence to the contrary -- and yesterday, Berkshire supplied even more.
On Wednesday, the candy-to-bricks conglomerate announced that it had acquired the remaining 20% of Israel-headquartered International Metalworking Companies -- more commonly known by the name of its largest subsidiary, Iscar -- for the sum of $2.05 billion. The transaction values Iscar at $10.25 billion. In 2006, when Berkshire acquired its initial 80% stake, it paid $4 billion for a $5 billion valuation. A doubling in value over a seven-year timeframe is a respectable return, especially in relation to the stock market's performance over the same period:
|
Increase in value* |
|
|
Berkshire's initial 80% stake in Iscar |
+105% |
|
Berkshire Hathaway |
+80.2% |
|
S&P 500 |
+19.4% |
|
Dow Jones Industrial Average |
+27% |
Source: Author's calculations, based on data from Berkshire Hathaway and Yahoo! Finance. *The return, which does not include dividends, is calculated from the date of the initial announcement, May 5, 2006, through May 1, 2013.
What's the secret to Buffett's success? It's hardly mysterious or complicated. In the Iscar acquisition, he paid a reasonable price for an outstanding business led by world-class management. What's odd is not the result, but rather the fact that more people aren't imitating the process in order to achieve that same result.
Of course, that suggests that the process remains repeatable. As Warren Buffet put it at the 2006 Berkshire Annual Meeting, "The nice thing is that there are many others [like Iscar] out there, but there aren't really other Berkshires out there."
Warren Buffett has said for a number of years that Berkshire's size will make beating the market increasingly difficult. However, he still expects to beat the S&P 500 by several percentage points, and Iscar's acquisition suggests it's an achievable goal.
