Berkshire Hathaway analysis: What do you think about Warren Buffett investing style in practice? If Warren Buffett holds Costco and needs to buy Phillip66, first, he has to sell his Costco shares. Don’t you think so? Warren Buffett gives so much advice about investing. Unfortunately, there is a thing that he does not tell us.
According to Warren Buffett, there are two mantras of investing:
- Buy company with durable business advantages and honest manager
- Let your investment grow with time
Investing textbooks have quoted those magic sentences countless times. Yet, Investors keep making unnecessary mistakes in the stock market. They chased momentum in popular stock and sold in panic at the end. More often, investors lose rationality and psychological control. What doesn’t Mr. Buffett tell us?
Missing Thing: What Warren Buffet Buy. Where That Money Come From?
To solve our puzzle, we need to elaborate on Berkshire’s financial report – a Berkshire Hathaway analysis you may call it. The Omaha-based conglomerate has become Warren Buffett’s investment vehicle since 1965. Maybe we can find some secrets.
According to its 10-K form for the Fiscal Year 2019, Berkshire Hathaway has invested 82,178 M in the stock market since 2017, detail is in the figure below. It is interesting to note that Berkshire made it up without cashing their previous investment. Don’t you ask where does the money come from?
Berkshire Hathaway Analysis: Private Company. Free Cash Flow.
In case you don’t know, Berkshire Hathaway controls several companies from many industries under its umbrella. From the railroad to carpet maker, from energy company to jet engine supplier. In the last 5 years, these private companies deliver a total of 114.581 M in free cash flow – enough to fund a total of 114.164 M of Berkshire Hathaway stock market investment. This is Mr. Buffett’s secret sauce.
To give you more insight into why it matters, suppose you buy Apple (AAPL) at 100 level today (which is not). You believe it has an intrinsic value of 400. In your waiting period – let say for 6 months, Mr. market gives a value of AAPL for 150, far below your expectation. Unfortunately, at the same time, you find ExxonMobil (XOM) quite attractive – but you have no money left. Under these circumstances, investors could cash the AAPL investment and go long for XOM. This is the difference between us and Mr. Buffett. He has free cash flow on regular basis.
Moreover, free cash flow keeps our minds and mentality at a rational level. You can’t make great decisions if you’re hungry, angry, or in hurry. Free Cash Flow ensures Mr. Buffet stays focus on his investment thesis without worry about what he eats, children’s education, or even dry powder to bomb a market.
Oracle Of Omaha Is Alchemist Of Nebraska
The investors have known Warren Buffett’s reputation for decades. Yet they never find out how his method works in the detail. People just know his word “value investing” or “economic moat”. Investingdeck fills that gap by posting this. We follow how Mr. Buffett makes money. At first, Berkshire creates a stream of money via its subsidiaries, especially insurance. If you follow the Berkshire story, you will know that Warren Buffett obsessed with insurance, and it explains a lot.
The next step of Berkshire is to invest that money, where the opportunity exists, whether in the stock market or private entity. In our perspective, Warren Buffett is not only a great investor. He is also a great businessman. A combination of those two aspects delivers unparalleled wealth creation. Unfortunately, the investor often overlooks this point of view.
Berkshire Hathaway Analysis: Deeper Detail. Control
Even in his 2019 letter to Berkshire shareholders, Warren Buffett still emphasizes control for Berkshire Hathaway. Begin with three criteria for his investment as follows:
- Good ROIC or Return on Invested Capital or to be more specific, a printing money machine like Apple or Amazon.
- Honesty, Stewardship, and last but not least – capability has to be manager characteristic.
- All that charactristic should be available at a fair price – even the excelenct business with excellent mamager oesn’t mean sky high valuation.”
The Oracle of Omaha continued, “When we find that kind of business along with manager characteristic, our preference would be to buy whole of them”. Having control means that Warren Buffett could affect management strategy or asset allocation, Nah, this is beyond our capability as a retail investor.
Investor Takeaway. The Case Against Full Time Investor
- We know that Robinhood become popular today, in this cycle, everyone is a stock market genius. We always warn investors to love their job, love your dumb boss, and try to get a click with a hot chick in your office (No, kidding). It will help you there. Your monthly salary could mimic Berkshire Hathaway Free Cash Flow. Don’t think to resign yet – maybe never. Your investment could bear fruit in 2 months, or 2 decades, depending on Mr. Market mercy.
- Warren Buffett builds his kingdom via business – he invests in the business and takes control. Warren Buffett is a businessman that invests, well, sorry, we can’t, you can’t. If you could manage your time, try to have business as support of your job, both can serve as multiple sources of income -a monthly free cash flow. It helps a lot to keep your liquid when a value opportunity knocks on your door.
- If you really like Buffet – so as we – limit your level, there is a little bit different of retail investors like us with Mr. Buffet’s approach. His favorite holding period is forever, he pursues Free Cash Flow, dividend, and control, while we may be a chase only for capital gain and protect our pension days – sometimes, we can’t hold it forever.
So, in the end, we strongly ask you not to be a full time-investor, we need more than that.