The Complete Financial History of Berkshire Hathaway

1. Berkshire Hathaway's transformation from struggling textile company to diversified powerhouse

"The net effect is that Berkshire Hathaway, the former New England textile mill, has been transformed into a company with a market value of about $13.5 billion, not counting securities it owns of other publicly-held companies."

A remarkable turnaround. When Warren Buffett took control of Berkshire Hathaway in 1965, it was a struggling textile manufacturer with dim prospects. Over the next three decades, Buffett transformed the company into a diversified conglomerate with interests in insurance, manufacturing, retail, and investments.

Key milestones in Berkshire's transformation:

• 1967: Acquisition of National Indemnity, entering the insurance business
• 1969: Purchase of Illinois National Bank
• 1972: Acquisition of See's Candies through Blue Chip Stamps
• 1983: Purchase of Nebraska Furniture Mart
• 1985: Closure of the textile business
• 1988: Major investment in Coca-Cola

By 1993, Berkshire Hathaway had become a holding company for a diverse array of businesses, with a market value of $13.5 billion and a reputation as one of the most successful investment vehicles in history.

2. Warren Buffett's capital allocation genius and long-term investment philosophy

"Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price."

Focus on quality and value. Buffett's approach to capital allocation emphasized investing in high-quality businesses with strong competitive advantages, rather than seeking short-term bargains. This philosophy guided Berkshire's investments in both wholly-owned subsidiaries and publicly traded securities.

Key aspects of Buffett's investment approach:

• Long-term perspective: Holding investments for years or decades
• Emphasis on intrinsic value rather than market fluctuations
• Concentration in best ideas rather than broad diversification
• Patience in waiting for the right opportunities
• Willingness to make large investments when conditions are favorable

Buffett's capital allocation skills allowed Berkshire to compound its book value at an average annual rate of 23.8% over 25 years, far outpacing the broader market and most other investment vehicles.

3. The power of acquiring and nurturing exceptional businesses

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Quality over bargains. Buffett learned that acquiring exceptional businesses with strong economic characteristics and talented management teams could create more value over time than buying mediocre businesses at low prices.

Examples of successful Berkshire acquisitions:

• See's Candies: Purchased in 1972, demonstrating the power of brands and pricing power
• Nebraska Furniture Mart: Acquired in 1983, showcasing the benefits of low-cost operations and scale
• GEICO: Gradually increased ownership, capitalizing on the company's low-cost insurance model
• Buffalo News: Turned around a struggling newspaper into a profitable enterprise

Buffett's approach to acquired businesses:

• Retain existing management and culture
• Provide capital for growth and expansion
• Allow autonomy in day-to-day operations
• Focus on long-term value creation rather than short-term results

4. Insurance as Berkshire's economic engine: Underwriting discipline and float investment

"Berkshire's insurance operations continued to generate large amounts of 'float' -- money we hold and can invest but that does not belong to us."

Dual benefits of insurance. Berkshire's insurance operations became the company's primary economic engine, providing both underwriting profits and a growing pool of investable funds known as "float."

Key aspects of Berkshire's insurance strategy:

• Underwriting discipline: Willingness to reduce premium volume during periods of inadequate pricing
• Focus on specialized and super-catastrophe coverage where Berkshire's financial strength provided an advantage
• Efficient operations, particularly at GEICO
• Long-term perspective on pricing and risk management

Float investment:

• Buffett used insurance float to make large, long-term investments in both public securities and wholly-owned businesses
• This "cost-free" capital provided a significant advantage in Berkshire's ability to compound wealth over time
• By 1993, Berkshire's float had grown to over $2.6 billion, providing substantial investment firepower

5. The importance of management quality and alignment with shareholders

"We've never succeeded in making a good deal with a bad person."

Character matters. Buffett placed great emphasis on the quality and integrity of management teams, both in Berkshire's wholly-owned subsidiaries and in companies where Berkshire held significant investments.

Characteristics Buffett sought in managers:

• Passion for their business
• Integrity and ethical behavior
• Talent for capital allocation
• Focus on long-term value creation rather than short-term results
• Willingness to admit and learn from mistakes

Examples of managers Buffett admired:

• Mrs. B (Rose Blumkin) at Nebraska Furniture Mart
• Chuck Huggins at See's Candies
• Jack Ringwalt at National Indemnity
• Tom Murphy at Capital Cities/ABC

Buffett also emphasized aligning management incentives with shareholder interests, often through significant ownership stakes and performance-based compensation structures.

6. Berkshire's approach to accounting, transparency, and shareholder communication

"We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed."

Honest and clear communication. Buffett set a new standard for shareholder communication through his annual letters, which provided detailed insights into Berkshire's operations, investment philosophy, and financial performance.

Key aspects of Berkshire's approach to accounting and reporting:

• Focus on economic reality rather than accounting conventions
• Detailed segment reporting to provide clarity on individual business units
• Emphasis on "look-through" earnings to capture the full economic impact of investments
• Discussion of mistakes and challenges, not just successes
• Clear explanation of complex accounting issues and their impact on reported results

Buffett's letters became must-read documents for investors, analysts, and business leaders, providing valuable lessons on business, investing, and corporate governance.

7. Learning from mistakes and the value of patience in investing

"The most important thing about an investment philosophy is that you have one you can stick with."

Embrace errors, stay the course. Buffett was candid about his mistakes and emphasized the importance of learning from them. He also stressed the value of patience in investing, avoiding the temptation to act simply for the sake of action.

Notable Berkshire mistakes and lessons:

• Textile business: Recognizing when to exit a structurally challenged industry
• Waumbec Mills acquisition: The pitfalls of trying to save a dying business
• Missed opportunities (e.g., Fannie Mae): The cost of inaction in attractive situations
• USAir investment: The dangers of capital-intensive, highly competitive industries

Buffett's approach to mistakes:

• Openly acknowledge and analyze errors
• Learn from mistakes to improve future decision-making
• Maintain a long-term perspective and avoid overreacting to short-term setbacks

The value of patience was demonstrated through Berkshire's willingness to hold large cash positions when attractive investments were scarce, and its ability to act decisively when opportunities arose.

8. The evolution of Berkshire's investment strategy: From cigar butts to wonderful businesses

"Time is the friend of the wonderful business, the enemy of the mediocre."

Quality over cheapness. Buffett's investment strategy evolved from Benjamin Graham's "cigar butt" approach of buying deeply undervalued, mediocre businesses to focusing on high-quality companies with durable competitive advantages.

Key shifts in Berkshire's investment approach:

• Early years: Focus on statistically cheap stocks and special situations
• Mid-1970s: Influence of Charlie Munger in emphasizing business quality
• 1980s and beyond: Large investments in outstanding businesses like Coca-Cola and Capital Cities/ABC

Factors driving the evolution:

• Recognition that great businesses compound value over time
• Challenges of managing and improving mediocre businesses
• Berkshire's growing size, requiring larger investments to move the needle
• Appreciation for the power of intangible assets like brands and network effects

This evolution allowed Berkshire to make increasingly large investments and acquisitions while maintaining its superior long-term performance.

9. Berkshire's decentralized management structure and unique corporate culture

"Berkshire's operating managers are far better at running their businesses than I am, and have been crucial to whatever success we have had."

Trust and autonomy. Berkshire developed a unique, decentralized management structure that allowed its diverse array of businesses to operate with significant autonomy while benefiting from the parent company's financial strength and long-term orientation.

Key aspects of Berkshire's management approach:

• Minimal interference in day-to-day operations of subsidiaries
• Retention of existing management teams post-acquisition
• Focus on capital allocation at the parent company level
• Emphasis on long-term performance rather than short-term results
• Lean corporate structure with minimal bureaucracy

This approach allowed Berkshire to:

• Attract and retain talented managers who valued autonomy
• Maintain the unique cultures and strengths of acquired businesses
• Operate efficiently with a small corporate staff
• Focus on long-term value creation rather than quarterly earnings targets

10. The impact of economic moats and pricing power on business value

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

Sustainable competitive advantages. Buffett placed great emphasis on identifying and investing in businesses with strong economic moats – sustainable competitive advantages that protect a company's profitability from competitors.

Characteristics of businesses with strong moats:

• Pricing power: Ability to raise prices without losing significant market share
• High barriers to entry: Difficult for new competitors to enter the market
• Network effects: Value increases as more users adopt the product or service
• Brand strength: Customer loyalty and willingness to pay premium prices
• Cost advantages: Ability to produce goods or services at lower costs than competitors

Examples of Berkshire investments with strong moats:

• Coca-Cola: Global brand strength and distribution network
• See's Candies: Brand loyalty and pricing power in a niche market
• GEICO: Low-cost operator in auto insurance
• Buffalo News: Dominant local newspaper with high market penetration

Buffett's focus on economic moats allowed Berkshire to identify businesses capable of generating high returns on capital over long periods, driving superior investment performance.

11. Berkshire's adaptation to changing market conditions and opportunities

"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."

Flexibility and opportunism. While maintaining a consistent overall philosophy, Berkshire demonstrated the ability to adapt to changing market conditions and capitalize on unique opportunities as they arose.

Examples of Berkshire's adaptability:

• Shift from textile manufacturing to insurance and investments
• Entry into the reinsurance business to capitalize on Berkshire's financial strength
• Opportunistic investments during market dislocations (e.g., Goldman Sachs during the 2008 financial crisis)
• Willingness to enter new industries through acquisitions (e.g., energy and railroads in later years)
• Evolution of investment strategy to accommodate Berkshire's growing size

Buffett's approach to market cycles:

• Maintain a long-term perspective and avoid market timing
• Build financial strength to capitalize on opportunities during downturns
• Remain disciplined and avoid chasing overvalued assets during bull markets
• Be willing to hold cash when attractive investments are scarce

This adaptability, combined with a consistent core philosophy, allowed Berkshire to thrive across various market environments and economic cycles.

Last updated: October 2, 2024