I am a great admirer of Warren Buffett. Therefore, it should come as no surprise that my new recommendation is his highly successful holding company, suggests Shawn Allen in Internet Wealth Builder.
Berkshire Hathaway (BRK.A, BRK.B) is well known as the investment company that has been built by Warren Buffett since 1965.
Since then, Buffett's strategies have resulted in the share price climbing 1.6 million per cent since 1965 and the book value per share had risen 799,000%. These are almost unfathomable results.
The strategy is to reinvest all earnings in companies that are stable and can be predicted to continue to earn excellent profits, that have good (and likable and ethical) management, and that are available at reasonable prices.
The equity investments are highly concentrated and the preference is to buy entire companies. Once bought, these subsidiary companies are never sold.
The corporate culture includes the highest ethics, deep respect for investors, and efficiency. Managers are highly rewarded for being as efficient as possible and making high returns on capital.
The use of debt is generally discouraged or minimized except in lending (financing) operations and in the railroad and utilities.
The company is highly decentralized. Head office is typically involved only in large capital spending decisions and in selecting, motivating, and compensating the top manager at each subsidiary.
The goal of the company is to grow intrinsic value per share over the long term at a rate higher than the total returns on the S&P 500.
Buffett has indicated on several occasions in recent years that Berkshire's intrinsic value far exceeds its book value and that the difference has widened in recent years. Berkshire will aggressively buy back shares if the price dips below 120% of book value (that is, below $124).
The level of earnings in any given period is somewhat unpredictable. It seems likely that Berkshire will continue to grow its size and earnings at an acceptable rate in the future. However, this would likely be in the range of perhaps 10% per year.
Given the price of the A shares – roughly $215,000 -- most investors will obviously choose the more affordable B series. The ratio of A shares to B shares is one to 1,500.
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By Shawn Allen in Internet Wealth Builder
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