Berkshire Hathaway Inc. (NYSE:BRK.A) has generated tremendous returns for investors and for Warren Buffett himself over a long period of time. His famous strategy, “buy and hold” cheap companies with good fundamentals, has been emulated by many with varying degrees of success. Jeff Macke of Yahoo! Finance has identified four traits of Berkshire Hathaway Inc. (NYSE:BRK.A)’s strategy and portfolio that may explain these substantial returns over such a long period of time.
First, contrary to the popular belief that the more diversified the stock holdings are, the better, Berkshire Hathaway Inc. (NYSE:BRK.A)’s portfolio is focused, says Macke. Four of the largest holdings make 58% of the entire portfolio. These companies are: Wells Fargo & Co (NYSE:WFC), The Coca-Cola Company (NYSE:KO), American Express Company (NYSE:AXP) and International Business Machines Corp. (NYSE:IBM).
Second, Buffett is wise enough to game taxes on earnings, as many other investors do. For instance, the acquisition of Washington Post by Amazon.com, Inc. (NASDAQ:AMZN), where the “Oracle of Omaha” has retained a profit of hundred times over the initial investment made in the 70’s. By swapping out shares instead of cash he avoided paying any taxes.
Third, Berkshire Hathaway Inc. (NYSE:BRK.A) has always been able to get for itself a sort of a cash cow for funding other ventures, the same way technology companies like Google Inc (NASDAQ:GOOGL) with Google Search and Microsoft Corporation (NASDAQ:MSFT) with Windows. Buffett’s formula for unlimited cash is investing in insurance companies, the cash of which he extensively used to finance a great deal of acquisitions.
Fourth and probably the most important, Buffett is a big fan of the American economy and very optimistic. He buys when the economy does poorly and sells when the economy does well. He gets cash from insuring against events with very low probability and buys into America.
“He generates cash betting against super catastrophic events in insurance and uses the money to bet against the collapse of the economy,” Macke said.