Here’s How Berkshire Hathaway Makes its Money

UTC by Adedamola Bada · 7 min read
Here’s How Berkshire Hathaway Makes its Money
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Check out the history of one of the world’s oldest and richest companies – Berkshire Hathaway. Find the company’s financial and business details, explore its road to success, and learn key investing tips from Warren Buffett.

Berkshire Hathaway, Inc. (BRK-A, BRK-B) is an American multinational holding firm that has her headquarters, called the Kiewit Tower, in Nebraska, US. It was started in 1839 by Oliver Chace (who died in 1852 at the age of 82) in Rhode Island, US, and went by the title of Valley Falls Company. The organization was initially created as a textile producing firm.

In 1929, Valley Falls merged with Berkshire Cotton Manufacturing Company and became Berkshire Fine Spinning Associates. In 1955, they decided to merge with another company known as Hathaway Manufacturing Company that was spearheaded by Seabury Stanton. By 1960, the organization was failing and they had to close several of their factories.

4 years later, Warren had a major falling out with Seabury and fired him, making him the sole owner of a business that was heading towards bankruptcy. He found ways to save his neck by diversifying into insurance companies, completely buying National Indemnity Company, and acquiring shares in GEICO. By 1985, the textile activities were halted finally.

Today, the firm also fully owns a number of other companies such as Forest River, Lubrizol, Duracell, amongst others. The holding group also has shares bought in some well-known companies such as Coca-Cola Co (NYSE: KO), Apple Inc. (NASDAQ: AAPL), American Express Company (NYSE: AXP), etc.

The holding group is spearheaded by Charles Munger who is the Vice-Chairman and Warren Buffett who has roughly 30% voting rights and 16% of their economic profits. He serves as the chairman and Chief Executive Officer of the company. Warren was popularly renowned for his investments in public organizations but he has diversified into the total acquisition of establishments. His purchase of the company back then has denied him returns totaling nearly $200 billion. Although he receives a meager yearly salary of $100,000, his net worth today according to Forbes is roughly $79 billion.

Berkshire Hathaway Inc. (BRK-A, BRK-B) has diversified into a wide range of business opportunities ranging from interior decors to clothing and utilities over the years. 4 years ago, the organization diversified into airlines, acquiring stocks in almost every major airline establishment in the US but recently sold all those shares at the beginning of 2020. Going by the latest Forbes valuation, the 8th biggest publicly traded organization, and the biggest financial service providing firm, having almost 400,000 workers.

Berkshire Hathaway Financial Details

By 2018, They were ranked 3rd on the Fortune 500 list of the biggest US corporations by revenue.

At the end of 2019, they earned about $80 billion, with their yearly income totaling $255 billion. Meaning that they had an increase in income of almost 3% from the previous year although they had one of the least net incomes that the organization had seen since 2005 of a mere $4 billion in comparison to the $44.9 billion of the year before.

Through the years, between 2005 till 2020, their net revenue has steadily improved. With an increment ranging between 15 to 20 billion every year, the multinational group can boast of one of the best returns in the world today.

Warren handles the most of Berkshire investments, working alongside two people who manage about $10 billion each. In 2006, Berkshire Hathaway made a huge move into sports, spending over $500 million while acquiring stakes in NBA, Bike racing, Gymnastics, etc., brands. During the monetary crises of ’08, Berkshire injected about $5 billion into Goldman Sachs, which brings returns of $500 million per annum and spent an additional $9.5 billion in buying stocks from Wrigley & GE that year. As of right now, Berkshire Hathaway owns roughly 3% of Sachs.

The biggest acquisition Berkshire has ever made was in 2009, using a little over $25 billion, they completely bought the parent company BNSF Corporation, of which they earlier owned 23.6%.

Between 2011 and 2015, Berkshire acquired Lubrizol Corp for about $9 billion, purchased a 52% share in Heinz, acquired PCC, bought a portion of Lee Enterprises, a newspaper establishment, and Gannett.

In 2017, Berkshire Hathaway acquired a lot of equity shares in American Express Company, IBM, Wells Fargo & Company, Coca-Cola, and Apple Inc, with the total amount nearing $900 billion. By 2018 May, Warren sold off of their stake in IBM and acquired more stocks in Apple Inc.

Berkshire Hathaway Businesses

The first time Warren made a long-term investment was back in 1972. He acquired the See’s Candies firm for $25 million which was over 3 times its value in assets and made returns of roughly $5 million in its first year. Over the next 45 years, the investment has generated an estimated $2 billion profit for Berkshire even though Warren has invested only about $50 million in developing the brand. The See’s candies generate roughly double the investment amount in profits only.

At 21, Warren Buffett had invested in Government Employees Insurance Company (GEICO) and had major of his net worth coming from said investments. It continued as such until he was 65, at which point he purchased the GEICO firm. They rake in major profits off the premium to claims margin which Warren uses to invest steadily. A year after Warren purchased GEICO, they were known as the 7th biggest insurance establishment for automobiles in America. They’ve risen through the ranks and are now the 2nd largest, losing out to State Farm.

Arguably the most lucrative establishment Warren has set up, Berkshire Reinsurance proceeds to flourish, with the oversight of Ajit Jain, who is the vice-chairman for all insurance-related activities, providing almost $40 billion for investments. In 2017, it generated $5 million in profits and a little over $20 billion for pure investments.

After its total acquisition in late 2009, Burlington Northern Santa Fe (BNSF) has grown to be one of the major cargo railroad webs in the Americas, having tracks in almost 30 states, about 8,000 trains, almost 50,000 employees, and Generating about $21 billion in 2017. Other than that, BNSF is frequently used to keep a portion of the income generated from their Reinsurance subsidiary while looking for alternative investments to inject the funds into.

Warren Buffett’s Investing Strategy and Tips

Warren generally limits his expenditure to firms he believes in their principles and can easily study and predict how well they will do in the stock market.

Buffet employs managerial tactics that assist him to monitor the performance of the higher officials, to know if they reinvest gains or stick to the capital provided by the firm. He also invests in smaller establishments who develop their own investment strategies, instead of borrowing off another firm’s existing strategies.

His financial principles are simple, he keeps his eye out of firms with big revenue margins and the EVA (economic value added) calculation, that compiles the organization’s gain after payment of profits to shareholders. He also considers the money allocated to the trader to determine how well the firm itself can generate dividends for its shareholders. He is also the man that came up with the term “moat”, which is “something that allows a firm to have an edge or lead over another but shields it from attack by the opposition.”

In his Value principles, Buffet aims at determining the value of what the firm is worth by calculating projected gains and then re-evaluating them to the current period, completely ignoring short term investments and focusing on investments that will realize profits in the long run. Unless a firm that is projected to do well experiences a minor setback, causing share prices to drop momentarily, then Warren could opt to purchase said shares at the discounted price.

Although, he advises many fresh traders to engage in cheaper index funds over singular funds because of their inexperience in maneuvering the stock market.

Buffett’s principles are the backbone on which he trades. Applying them could be cumbersome, taking into consideration the many factors to be considered and the math involved, but investors who can properly deploy his strategies can invest just like him and watch their securities rake in profits.

Conclusion

The business has stood gallantly for almost 200 years. Over time, it has recorder major wins, especially under the control of the brilliance that is Warren Buffett, revolutionizing the firm into the jack of all trades, with the most pricey class A stocks in history without ever having a stock divide, and well over 10 companies under their management and even more under their influence.

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