What makes Berkshire Hathaway a great company is how it allocates capital to different investments
“Berkshire is often labeled a conglomerate, a negative term applied to holding companies that own a hodge-podge of unrelated businesses,” Warren Buffett (Trades, Portfolio) wrote in his 2020 letter to shareholders. “And, yes, that describes Berkshire – but only in part.”
That’s the part which includes outright ownership and control of entire companies, like GEICO, Acme Brick Co., Lubrizol, BNSF Railway and Marmon Holdings, to name a few.
The other part includes minority equity positions in publicly traded companies, which give Berkshire Hathaway little or no control of management.
This dual form of corporate ownership makes Berkshire Hathaway a collection of controlled and non-controlled businesses.
Still, Berkshire Hathaway’s conglomerate differs from traditional conglomerates in the way it acquires companies. Rather than hunting for “so-so” companies that are up for sale, as traditional conglomerates do, Berkshire Hathaway is looking for companies with sound fundamentals and good management.
“Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price,” Buffett wrote. “If that strategy requires little or no effort on our part, so much the better.”
What kind of companies will fit this profile? Buffett wrote, “The best results occur at companies that require minimal assets to conduct high-margin businesses – and offer goods or services that will expand their sales volume with only minor needs for additional capital. We, in fact, own a few of these exceptional businesses, but they are relatively small and, at best, grow slowly.”
But there are some exceptions to this rule as well. These exceptions include asset-heavy companies that have substantial physical barriers to entry, like railroads, which Berkshire Hathaway has in its portfolio.
The bottom line is what makes Berkshire Hathaway a great company isn’t what controls and what it doesn’t, but how it allocates capital to different investments.
Disclosure: I have no positions.
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About the author:
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.
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