Facts You Should Know About Berkshire Hathaway

American Company Berkshire Hathaway is led by legendary investor Warren Buffett.

About Berkshire Hathaway :

The simplest way to categorise Berkshire Hathaway is as a "conglomerate." Although Warren Buffett dislikes the word, he has come to terms with the fact that Berkshire is a conglomerate with a twist.

Berkshire is a conglomerate like any other because it includes holding entities for unrelated businesses. Buffett, thinks Berkshire is different from other conglomerates. Why?

"Buy enterprises in their totality," is the usual conglomerate's goal. The issue begins right here. According to Buffett, "a great company would not permit anyone to take them over." Conglomerates soon start buying businesses with a small or nonexistent economic moat as a result of this.

In most instances, these conglomerates also have to pay enormous sums of money to acquire complete ownership of a subpar company. They then use creative accounting techniques to defend the price paid.

The ownership of all or a portion of their holding corporations is up to Warren Buffett. They will do it, even if it means purchasing just 1% of the business. Own shares in companies with strong "economic characteristics and good managers" are their primary concern.

Holding Companies of Berkshire :

The portfolio of Berkshire contains two different kinds of businesses: first, those in which it has a nearly 100% ownership share, and second, those in which it has a less significant ownership stake.

There are many businesses that Berkshire owns around 100% of. I'll thus leave you with a simple link to click on. These are all excellent businesses that were acquired at discount prices (with an exception).

The second list is condensed. These are businesses where Berkshire Hathaway does not possess a full 100% of the shares. The names of a few well-known companies are mentioned here.

As a result, we now know which companies Berkshire Hathaway owns 100% or more of. Warren Buffett highlighted the names of four companies that make up the majority of Berkshire Hathaway's portfolio. These businesses are described by him as "all four are gems."

Buffett further confirms to its investors that Berkshire’s shares would never be “repurchased at simply any price.” They opted for this massive buyback because it would surely “enhance the intrinsic value per share for continuing shareholders” over time.

Acknowledgment of a Mistake

I can’t imagine any other company’s Chairman/CEO admitting his mistake in such a subtle manner. Probably this is what people, mainly Americans, love about Warren Buffett.

Buffett admits his mistake. He does it without mincing his words.

In the portion of the report where the net earning of Berkshire Hathaway is declared, there was a negative component of $11.318 Billion mentioned as “others”.

In FY-2020, Berkshire reported net earnings of $42.5 Billion. This value is after adjusting for the “other” component of -$11.318 Billion. The clarification of it came from Buffett on the 4th page itself of the annual report.

Berkshire bought a company called Precision Castparts (PCC) in the year 2016. Buffett admits, “I paid too much for the company.” He further says, “I was simply too optimistic about PCC.”

Though Buffett also adds that, PCC is a “fine company – the best in its business.” He further says, “I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations.” But Buffett concedes that he made a mistake in “judging its average amount of future earnings.” Hence, he ended up estimating the wrong intrinsic value of the company.

Other Interesting Facts About Berkshire and Warren Buffett :

Reading the annual report of Berkshire Hathaway is effortless. I’ll suggesting to go ahead and download it from the company’s website. Give it a read. I’m sure you too will enjoy and learn.

Now I’ll quickly add some interesting facts and figures about the company.

#1. Who is Ajit Jain?

There is this person of Indian origin named Ajit Jain (Age 69) on the board of Berkshire Hathaway. Warren Buffett is fond of this man. Ajit Jain is an IIT-KGP alumnus of the 1972 batch (BTech – Mechanical). He also did an MBA from Harvard University. Presently, Ajit Jain is the Director – Vice Chairman – Insurance Operations. On the 7th page of the annual report, Warren Buffett mentions Ajit Jain.

#2. What are Class-A and Class-B shares of Berkshire?

There are two common stocks of Berkshire listed on NYSE (BRK.A, BRK.B). Both these shares trade at different price levels.

Why the company has two shares? Class-B shares have a lower market price. This enables even retail investors to buy shares of Berkshire. Otherwise, Class-A shares are priced at $412,729 per share. For the majority of small investors, it is difficult to invest this kind of money to buy just one share of a company.

There was another reason for launching Class-B shares. As Class-A shares price was high, small investors took a mutual fund route to invest in Berkshire’s stocks. These mutual funds were making money by just duplicating the portfolio of Berkshire.

#3. Warren Buffett’s Stake in Berkshire?

Warren Buffett holds about 248,734 number Class-A, and 10,188 number Class-B shares of Berkshire. It gives him a 15.6% stake in Berkshire Hathaway. As per the current share price, a 15.6% stake in the company is equivalent to $102.6 Billion.

#4. Who are the top managers of Berkshire Hathaway?

Since 1970 Berkshire Hathaway has been run by Warren Buffett. In 1978, he was joined by Charlie Munger. Over the period, few more people have joined Berkshire and have attained the position in the Board. Five names of prominence are shown below:

#5. What is the source of income for Berkshire?

The total portfolio of Berkshire Hathaway can be categorized into four categories. All companies, controlling and non-controlling, falls within the ambit of these four categories. Income, net profit and profitability of each business head is shown below:

#6. Why Berkshire’s Class-A shares do not split?

Warren Buffett has not allowed any stock split of Berkshire’s Class-A in all these years. Instead, there have been shares buyback on multiple occasions. The result is that, each Class-A share, trades today at a whopping price of $412,729 (~Rs.2.88 crore per share). Needless to say that it is very tough for common people to buy Class-A shares of Berkshire.

But why Buffett does not split the stocks?

He does so to attract only such investors who can buy Berkshire’s stocks and hold them for like forever. He believes, people who have the appetite to spend about $4 Lakh dollars to buy a single share, are psychologically more tuned to hold stocks for a very long time.

Berkshire has Class-B shares which do split. When it was first introduced in 1996, it was issued at 1/30th of the price of Class-A shares. Then in the year 2010, the stock was again split in a 50-1 ratio. This is the reason why the EPS of Class-B shares is $43.6, while that of Class-A shares is $65,454 per share.

#7. Why Berkshire does not pay dividends to shareholders?

For the FY-2020, Berkshire has reported a cash balance of about $3.276 billion. Even though the company has such huge cash reserves, it never pays dividends. It has paid dividends only once in 1967. Why the company pays no dividends?

Buffett believes that he can use the available cash to acquire or invest in new companies. He also prefers using cash to buy back Berkshire’s shares. By following this principle, Berkshire has generated phenomenal returns for its shareholders.

Since 1965 to 2020, Berkshire’s shares grew at a rate of 20% p.a. compared to S&P 500 (with dividends) growing at 10.2% per annum.

#8. Who will be the successor of Warren Buffett?

Warren Buffett is 90 years old and Charlie Munger is 97. This question has been repeatedly asked that after Buffett who will be the CEO of Berkshire Hathaway? In a recent press conference (May-2021) a statement was made by Buffett and Charlie Munger that, Greg Abel will take the charge of Berkshire Hathaway.

In 2018, both Ajit Jain and Greg Abel were promoted to lead the insurance and non-insurance business head of Berkshire respectively. So in a way, both were in contention for the top post during all these years. But now it is becoming more clear that Greg Abel will be at the helm of affairs and Ajit Jain will be his immediate deputy.

Conclusion :

Warren Buffett purchased Berkshire Hathaway in 1965. At that time it was a textile company. During all these years, Buffett and Charlie Munger have transformed a textile company into a holding company. Berkshire has become a coveted brand in the world. Company’s like Duracell, GAICO, BNSF, McLane, Lubrizol, Fruit of the Loom, etc are under the umbrella of Berkshire.

Source: Google