Thinking about investing in Warren Buffett's Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B)? It turns out he's absolutely honest in how he plans to grow the dollars you put with him. And it may not be how you think.
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The absolute honesty
In his 2012 letter to Berkshire Hathaway shareholders, Buffett noted:
Charlie and I hope to build per-share intrinsic value by (1) improving the earning power of our many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) participating in the growth of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large acquisition. We will also try to maximize results for you by rarely, if ever, issuing Berkshire shares.
While the headline news will always be about what stocks Berkshire Hathaway buys and sells, it's critical to understand Buffett doesn't see those investments as the driving forces which will deliver shareholder returns.
His first two points indicate as much, and instead he wants us to see that the things which will propel the value of Berkshire Hathaway forward into the future will come from the collection of operating businesses which now make up Berkshire itself.
This is why Buffett openly admitted in 2010:
In Berkshire's early years, we focused on the investment side. During the past two decades, however, we've increasingly emphasized the development of earnings from non-insurance businesses, a practice that will continue.
Since 1990, the earnings delivered by the non-insurance and operating businesses of Berkshire Hathaway -- think its manufacturing, railroad, energy, and other segments -- have grown at an average rate of 21.5% a year, whereas its investments have increased by 13%.
Or shown a little differently, the growth $1,000 of investments made by Berkshire Hathaway in 1990 would look radically different than $1,000 placed into its operating businesses:
Of course, it must be noted both of these would far outpace the $1,000 growing into $8,750 if it was parked in the S&P 500 -- but it also goes to show how dramatically the operating businesses of Berkshire have grown over the last two decades.
And to put this change into even more clarity, consider the radically different picture of the breakout of earnings from the operating businesses which made up Berkshire in 1999 versus 2013:
To summarize, it isn't just Buffett's words which show us the change at Berkshire: clearly the numbers do too.
The key takeaway
When it comes to investing -- not just in Berkshire Hathaway, but in all companies -- Buffett said in 1996:
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.
In this we must see the importance of understanding the core business -- or businesses in the instance of Berkshire -- of a company before an investment decision is made. And people considering an investment in Berkshire must take the time to learn about the businesses which make it up, and not just think of it as a hedge fund or something of that sort.
But the reality is, if the last 40 years are any indication, Berkshire Hathaway is among the businesses "whose earnings are virtually certain to be materially higher five, ten and twenty years from now."
