06 Mar 2018 16:40 IST

The Berkshire juggernaut that launched Warren Buffett

Berkshire Hathaway is a sprawling industrial conglomerate with its finger in many pies

There must be something special about a company whose annual shareholders meet draws 30,000 attendees and sends airfares in the neighbourhood shooting up. With Warren Buffett just releasing his annual shareholders letter for 2017, the countdown has begun for Berkshire Hathaway’s 2018 AGM on May 5. With the dates out, many of India’s big-name investors are likely queuing up to book flights to Omaha, Nebraska to attend the jamboree in the first week of May.

What is it?

Berkshire Hathaway Inc is a company listed on the New York Stock Exchange in which 36.8 per cent of the shares are owned by Warren Buffett. While many investors think of Berkshire as an investment firm akin to a mutual fund, it is in reality a sprawling industrial conglomerate with its finger in many pies.

Through a web of subsidiaries, it runs businesses ranging from insurance, railroads, auto parts, ketchup and carpets, to real estate broking and aviation services. At the core of Berkshire’s operations is its insurance business which generates a lot of ‘float’ money by way of the premiums it rakes in each year. Berkshire uses this float, as well the cash churned out by its businesses, to make new acquisitions and add to its famous stock portfolio from time to time. Berkshire’s equity portfolio (valued at $170 billion in 2017), consisting of its investments in stocks such as American Express, Apple, Bank of America, Coca Cola and Goldman Sachs, is thus just one facet of its $700 billion balance sheet.

Why is it important?

Buffett’s main claim to fame is the enormous wealth he has generated for the investors in the Berkshire Hathaway share over the five-odd decades in which he has helmed the firm.

When Buffett acquired the firm in the mid-1960s, it made piddly profits of $2 million on sales of less than $50 million from a shaky textile business. But over the years, Buffett went about bolting on acquisitions in railroads, utilities, general and reinsurance and industrial products to the firm. Berkshire thus expanded its size at a scorching pace.

With the bought-out firms churning out large profits and cash flows, the Berkshire juggernaut has acquired a momentum of its own in the last two decades. By 2017, the company reported net profits of $44.9 billion on total revenues of $242 billion. Not only is it ranked among the top global corporations, it has managed a cool 22,000 times expansion in profits and a 4,800 times revenue growth in 50-odd years.

This furious pace of expansion has been lapped up by the stock market, with the stock delivering a 19.1 per cent return over its five-decade history, earning nearly twice as much as the US market (9.9 per cent). The price of one Berkshire (Class A) share has shot up from $19 just prior to Buffett’s entry, to over $300,000 now, making it one of the most expensive shares in the world. Buffett and partner Charlie Munger’s ability to spot and snap up winning businesses at bargain prices has earned them a cult following in the investing community and the mainstream media.

Why should I care?

If you’ve been a fixed-deposit investor who has never seen reason to step into the big bad world of stocks, Berkshire’s story may inspire you to take the plunge. If you’re a cynical stock investor, who asks what businesses and balance sheets have to do with stock price moves, then there are a few lessons from Berkshire for you as well.

The bottomline

Stocks are slaves to business growth.

(The article first appeared in The Hindu BusinessLine.)