﻿Since 1965, Berkshire Hathaway has served as Warren Buffet’s primary holding company
for investments and corporate acquisitions. In the last 57 years Berkshire Hathaway has had an
annual average return of approximately 20% per year. This means that if we had purchased $1,000
worth of Berkshire Hathaway in 1965, it would be worth around $30 million dollars today. Many
of us might not be so lucky to have owned a share of Berkshire Hathaway since 1965,
but we can learn several valuable investing lessons from it nonetheless. Hi, if you are new
to the channel, my name is Tae from Financial Tortoise. Where we learn to grow our wealth,
slow and steady. Today we are going to discuss Berkshire Hathaway. One of the
largest companies in the world based on market capitalization. As of the time of this video,
Berkshire Hathaway is ranked as the 7th largest company in the United States.
So how did a former textile company from the 19th century come to become this giant of a company?
Let's take a step back and talk about its origins a bit to get a real appreciation of how far it has
come today. An interesting fact that many people don’t know about Berkshire Hathaway is that it
was originally a company composed of a group of textile milling plants. Hathaway Manufacturing
Company (incorporated 1888) and Berkshire Cotton Manufacturing Company (incorporated 1889).
Berkshire Cotton became Berkshire Fine Spinning Associates in 1929 and merged with Hathaway to
form Berkshire Hathaway, Inc., in 1955. By the 1960s, this obscure New England company was
struggling to survive and Warren Buffet assumed control in 1965. Since then, slow and steady,
Warren Buffet and Charlie Munger, his business partner, started adding companies under its
investment umbrella. Today, It owns a variety of well-known private businesses such as GEICO,
Dairy Queen and See’s Candy. While at the same time owning a significant minority interests in
public companies, such as Apple, The Coca-Cola Company and American Express. As the 7th largest
company in the United States, it has a market capitalization of close to $700 billion dollars.
So, what are the key characteristics and lessons that allowed for such success?
We’ll talk specifically about 7 in this video. And I believe these are timeless
investing principles that we can always apply to our own investing principles. Number one
timeless investing lesson that we can learn from Berkshire Hathaway is its approach to cash.
Warren Buffet and Charlie Munger have said in their 2014 Berkshire Hathaway annual report that
they vowed never to keep less than $20 billion dollars in cash. They never want to be caught in a
position where they have a shortage of liquidity. When COVID-19 caused a market crash in 2020,
Berkshire had $137 billion in cash. While everyone else was panicking from uncertainty, Warren
Buffet and Charlie Munger were making Berkshire Hathaway even more indestructible in the face
of many unknowns. And their cash strategy isn’t just so that they can sleep soundly at night.
Even though that is a major reason. Berkshire Hathaway holds a lot of cash so when good deals
come up, Warren Buffet and Charlie Munger could be at the front of the line to take full advantage.
During the financial crisis of 2008, when companies like Lehman Brothers and AIG were
at the brink of collapse due to cash issues, Warren Buffet was looking for deals. Because he
had liquidity in face of unprecedented financial turmoil, he was able to make billions by investing
in Goldman Sachs and General Electric. All the while companies were going under and everyone
else was losing billions. In the same way, we should always keep good enough cash in reserve
so we are never forced to sell stocks, or any other assets, in a downturn. We may not all have
$140 billion dollars like Berkshire Hathaway. But a good starting place is 3-6 months of our monthly
expenses in a readily available checking or savings account. In times of uncertainty like the
current COVID crisis and a rocky market, I would go even as far as 12 months of cash. The second
timeless investing lesson from Berkshire Hathaway regards debt. Many companies and corporations, in
the spirit of growth, most often take aggressive approaches to debt. They believe that growth is
what matters and debt is a normal mechanism to make that happen. Interestingly, Berkshire
Hathaway takes a very conservative approach when it comes to debt. According to its owner’s manual,
in their own words: “We use debt sparingly and, when we do borrow, we attempt to structure our
loans on a long-term fixed-rate basis.” - Owner’s Manual Warren Buffet built up Berkshire Hathaway
by getting interest to work for him, instead of working to pay interest as many Americans do.
In his 1991 speech at University of Notre Dame, he said “I’ve seen more people fail because of liquor
and leverage — leverage being borrowed money.” He firmly believes that we don’t need leverage as
much in this world as the financial media makes it be. “If you are smart, you are going to make a lot
of money without borrowing.” And Warren Buffett puts his money where his mouth is. According to
Berkshire Hathaway’s 2020 annual report, its net long-term debt for the year was $7.909 Billion.
Remember, Berkshire Hathaway was holding close to $140 billion dollars in cash around the same time.
Berkshire Hathaway uses debt very sparingly and we should learn to do the same. Not accepting debt
as a normal way of life. And not as a necessary component to building wealth. As Warren Buffet
said - if we are smart, we can make a lot of money without borrowing. The third timeless investing
lesson we can learn from Berkshire Hathaway is related to control. It’s not an accident
that Warren Buffet and Charlie Munger set up their main investment vehicle as a public company. Not a
fund. When fund managers run a mutual fund, they are always worried that shareholders will pull
their money and abandon the fund when they aren’t doing well. Panicked shareholders can yank away
control quickly by choosing to move their money elsewhere. To an extent, what Buffet has done
with Berkshire Hathaway is to create a closed-end fund. During the 2008 financial crisis, Berkshire
Hathaway’s stock took a dive like thousands of other companies. It plunged by more than 50%
from September 2008 to March 2009. However, this short-term market volatility had zero impact on
the long-term value of the business. On the contrary, Buffet was able to use the crisis
to his advantage. Using his cash reserve, he boosted Berkshire Hathaway’s value by injecting
billions of dollars into troubling companies like Goldman Sachs and General Electric. All
in terms that were highly favorable to Warren Buffet and Berkshire Hathaway. In the same way,
we always want to be in control of our own money. The financial media tries to make us
believe that we need investment or financial advisors in order to make money in the market.
And unfortunate to many common investors who feel investing is too complicated. It's only made
complicated by the financial industry who spend billions of dollars in ads to make it seem more
complicated than it needs to be. Noone cares about your money more than you do. Investing
doesn’t have to be complex and if someone tells you that is it, they likely have other incentives.
Learn to manage your own investments so you aren’t at the mercy of the financial industry. If you
want a good starting place for your investments, check out my video here on “5 Best Vanguard Funds
to Buy & Hold Forever.” Number four timeless investing lesson from Berkshire Hathaway is
its long term approach. Warren Buffet has said "If you aren't willing to own a stock for ten years,
don't even think about owning it for ten minutes." None of the companies purchased
or investments made by Berkshire Hathaway was ever done with a short-term mind mindset.
Warren Buffet and Charlie Munger didn’t choose companies or stocks
because they thought the price was going to rise this week, this month or even this year.
They bought and invested in companies because they wanted to own those businesses for the long-term.
Yes, they still sell stocks occasionally and for a variety of reasons. But their primary approach is
still with the mindset of owning them forever. For example, Berkshire Hathaway has owned Coca Cola,
which it owns about 10% of its shares, for 34 years. American Express, 29 years Costco,
22 years. Not compare that to an average investor who holds a share for 5.5 months. So, when we are
approaching our own investment, we should have a longer term mindset. That once we buy a specific
fund, we should plan on holding it forever. Not trying to time the market. Not trying to buy
stocks for cheap so we can sell them for a hefty profit quickly. There are countless studies that
show that market timing is a fool's errand. Motley Fools defines market timing most accurately.
“a strategy based on predicting short- term price changes in securities, which is virtually
impossible to do.” - Motley Fools. Learn from the best and focus on long-term investments,
not short-term market timing. The number five timeless investing lesson from Berkshire Hathaway
is a diversified approach to investing. According to its owner’s manual: “Our preference would be to
reach our goal by directly owning a diversified group of businesses that generate cash and
consistently earn above-average returns on capital.” - Owner’s Manual As I mentioned
earlier in the video, Berkshire Hathaway started from a very humble beginning as a textile company
from New England. Today, it’s transformed to a point where the original owners would not
even recognize it. It has one of the most diverse groups of businesses that is only unified by the
fact that they are solid, high quality businesses that produce overwhelming value to its customers.
If you are to look under the hood of some other major corporations, there is most often
some common theme across all their sub businesses. Common product. Common technology. Common service.
When you look under Berkshire Hathaway, we find 65 different and diverse companies. These include
Duracell, International Dairy Queen, Pampered Chef, Fruit of the Loom, NetJets, and GEICO, among
others. In addition to owning private companies, Berkshire also has a large investment portfolio of
stocks in major public companies, such as Apple, Bank of America, and United Parcel Service (UPS).
We may not have Warren Buffet’s business selecting abilities but we can follow his philosophy
of diversity by investing in well diversified low cost index funds like S&P 500 index funds
or total stock market index funds. We won’t know which companies will do well or not do well, so
the best approach is to just buy all of them. If you like to learn more about some of my favorite
index funds, check out by video here. Number six timeless investing lesson from Berkshire Hathaway
is its minimal overhead. Berkshire has a market capitalization of $700 billion dollars and 372,000
total employees worldwide. Yet, its headquarters is made up of 25 people. Yes, you heard me right.
25 people. And Warren Buffet has no intention of growing its size any time soon. As companies get
bigger, it's natural to grow their staff. Part of it is there is more administrative work to manage
a growing company. But oftentimes, growth comes from the desire to look important. Bigger staff
signals importance. It signals success. However, Berkshire Hathaway doesn’t care about that. It’s
a $700 billion company, yet Warren Buffet doesn’t need his ego stroked with a huge
staff milling around to make him look important. In the same way, as we grow our net worth,
let’s be careful not to grow our ego. Money can provide a lot of things, but oftentimes, we don’t
need a lot of money to find true satisfaction. If a company worth $700 billion dollars and a
man worth $100 billion can find satisfaction with a 25 person headquarters staff in Omaha, Nebraska,
I’m sure we can do the same on a smaller scale. Number seven timeless investing lesson from
Berkshire Hathaway is its emphasis on lack of dependency. In his 2018 letter to shareholders,
Warren Buffet wrote, “Charlie and I never will operate Berkshire in a manner that depends on
the kindness of strangers.” Warren Buffet and Charlie Munger intentionally constructed
Berkshire Hathaway in a manner that will allow it to comfortably withstand even the most
extreme market conditions. Thus the reason why they have not only survived well for 50 years,
but also thrive. They don’t take unnecessary risks. They don’t invest in companies they don’t
understand. They hold a good amount of cash. Always. And they are focused on the long-term
game. In the same way, we can apply the same principle of resilience to our investing and
personal finance strategy. Look to invest for the long run. Never invest in something just because
everyone else is talking about it. And hold cash as a bumper to the uncertainties of life.
Thank you guys for watching and if you like to learn more about my favorite long-term
investment duo, check out my video here. Until next time, all the best.