Motley Fool: A comely conglomerate
Warren Buffett is widely considered to be one of the best investors in history. The value he has created for Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) shareholders has become apparent over the past decades, as Berkshire’s collection of wholly owned subsidiaries has expanded, increasing the company’s cash-generating capabilities.
Berkshire’s market value was recently $450 billion, while the value of its stock portfolio was $148 billion at the start of the year. In other words, Berkshire’s nonstock holdings are worth close to $300 billion. The cash flow thrown off by these diverse businesses gives Buffett the ammo for his elephant gun, and it’s the quality of the businesses that has them generating so much consistent profit.
Today’s Berkshire is an amazingly diverse company. Its subsidiaries range across multiple industries, including railways, regulated utilities, insurance, consumer goods and industrial manufacturing. Some of its subsidiaries are GEICO, Benjamin Moore, Brooks, Duracell, Justin Brands, See’s Candies, International Dairy Queen, Fruit of the Loom and the massive BNSF railroad. This combination limits Berkshire’s exposure to any single industry and tempers the effect of weak consumer spending in a recession.
Buffett has built an incredible business. The most amazing thing about it may not be what it has become under his leadership, but how strong it is set to remain after he’s gone. (The Motley Fool owns shares of and has recommended Berkshire Hathaway.)
Ask the Fool
Q: I’m considering selling my stocks and keeping the cash in case the market crashes so I can grab some bargains. Is that a good idea? – S.W., Jeannette, Pennsylvania
A: If you sell your stocks and the market does crash, you will have acted brilliantly. But what if the market keeps rising for a good while longer? You’ll miss out on a lot of gains. No one knows what the market will do in the short term. In the long run, it tends to go up.
That said, keep any money you’ll need within the next five (or even 10) years out of stocks, since a crash can happen at any time. But otherwise, it’s often best to remain fully or mostly fully invested, and to try to add to your holdings when it sinks. If you’re not comfortable in stocks, though, sell some or all of them.
Q: I’m intrigued by certain industries. How can I learn enough about them so I can invest in them? – J.O., Dallas
A: Industries vary in their complexities, so some will be easier to understand (retailing, travel, consumer products) than others (biotechnology, financial services). You’ll learn the most by reading broadly. Read many annual reports of companies in the industry, including the comprehensive 10-K reports that detail each company’s successes, challenges and plans. Don’t worry if you don’t immediately understand it all – many concepts will sink in over time.
Your brokerage may have Wall Street analyst reports available for companies of interest, and you’ll likely find articles at Fool.com and elsewhere on companies of interest.
If you’re serious about developing investing skills, learn more about accounting. Being able to understand financial statements is very valuable.
My dumbest investment
I am an energy consultant, and I did some business with Enron. They almost never lost a customer over price. That should have been a heads-up to me. I used to laugh with some other energy managers, wondering how they could make any money. I got the answer a couple of years later, when it turned out that the company wasn’t making as much money as it said it was, and instead was cooking its books.
Unfortunately, scratching my head about how it made money did not stop me from buying Enron stock a couple of times. I leave the remains of the investment on my statement, so I am constantly reminded about it. I hope to never ride a stock to zero again. – S.W., online
The Fool responds: You were far from the only person who fell victim to Enron’s accounting fraud – which was one of the largest in history – and many who lost a lot were not small investors, but Wall Street professionals. A key lesson from this story is to avoid investments that you don’t understand. If you don’t have a good handle on exactly how a company makes its money, steer clear.
Enron’s financial statements were known to be very confusing, yet Wall Streeters bought and recommended the shares. The Securities and Exchange Commission and credit rating agencies also took heat for insufficient oversight and due diligence.