Buy Berkshire Hathaway: Follow The Oracle Of Omaha

Since 2018, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) stock has been in consolidation mode, which should pique the interest of long-term investors.

Long-term market-beating performance

Warren Buffett has been a great long-term investor and has generated excellent total returns over many years. From 1965 to 2018, BRK’s book value per share (“BVPS”) compounded at 18.7% per year, while the stock compounded at 20.5% per year, which more than doubled the S&P 500 total returns of 9.7% per year.

The Berkshire Advantage

The Top-Notch Insurance Operations

Berkshire’s well-run underlying insurance business generates float as a source of low-cost capital. In The Outsiders written by William N. Thorndike, Jr. that discusses “eight unconventional CEOs and their radically rational blueprint for success”, the author explained that

Over time, Buffett evolved an idiosyncratic strategy for his insurance operations that emphasized profitable underwriting and float generation over growth in premium revenue. This approach, wildly different from most other insurance companies, relied on a willingness to avoid underwriting insurance when pricing was low, even if short-term profitability might suffer, and, conversely, a propensity to write extraordinarily large amounts of business when prices were attractive. (Page 179)

In the first half of 2019, the consolidated combined ratio of Berkshire’s insurance and reinsurance businesses was 94.5%. GEICO, its core insurance business, generated more than 65% of the premiums earned and had a combined ratio of 93.3%, which helped improve the consolidated combined ratio. The combined ratio is the sum of the loss ratio and expense ratio, such that <100% implies profitable insurance operations…

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Disclosure: As of writing, we’re long BRK.B.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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