Legendary billionaire Warren Buffett, who runs the investment conglomerate Berkshire hathaway has an eye-popping net worth of $84 billion and ranks third on the Forbes’ rich list. An inspiration to stock market investors worldwide, Warren Buffett is synonymous with value investing. But, how does he make money? In other words, what is the business model of Berkshire Hathaway? It’s intriguing to note that Berkshire Hathaway stock price has risen from just $8 in the 1960s to $2,94,650 on 28th March 2018. This implies that investors have made 36,831 times their initial investment in a span of 60 years. In other words, Rs 1,000 invested into the company is 1960 would be worth 3.68 crore today!
In a letter to shareholders, Buffett explains that he focuses on two value buckets. The first bucket consists of the operating businesses of Berkshire Hathaway’s such as GEICO, Dairy Queen, BNSF Railway, Lubrizol, Fruit of the Loom, Helzberg Diamonds among various other big businesses, in which the company has a controlling stake. The huge empire of Berkshire boasts of leading businesses such as BNSF Railway, the 2nd largest freight line in North America and GEICO which is number 2 in the auto insurance industry. Notably, even non-core businesses such as Fruit of the Loom Inc are significant business. According to media reports, Fruit of the Loom Inc sells more men’s underwear in the United States than anyone else does.
These humongous businesses provide Warren Buffett with the much needed moat, or “available reserves.” For example, while the insurance premiums received in GEICO doesn’t belong to Berkshire Hathaway, it still remains on hand to be invested as its managers see fit. Interestingly, estimated at a whopping $100 billion, the free reserves are at more than 50 times what it was a generation ago. This allows Warren Buffett to buy up other companies or even increase stake in what he believes are lasting businesses.
Thus, the business model is simple and can be viewed as a closed-end fund, whose shares can be redeemed only in the stock market by selling to other investors. Another interesting aspect to note is that while Buffett loves to receive a dividend, he loathes to pay out any. The dividend income from top six companies in Berkshire’s portfolio alone in a year is estimated at roughly about $2,860 million.
The burgeoning $100 billion cash pile has led the even Warren Buffett to reconsider his stance on paying out dividends. Earlier this year, Warren Buffett said, that a time could come ‘reasonably soon’, when the company will reexamine, its strategy of using the cash pile to pay dividends or even repurchase shares.