However, the main reason why this mutual fund comparison is true, because Berkshire performs better during market down-turns, which represents a great hedge. Buffett puts it in his own way, “We do better when the wind is in our face”.
5. A Sweetheart Deal
In the recently acquiredH.J. Heinz Company (NYSE: HNZ)deal, Buffett once again put his negotiation skills to good use. Berkshire will put up $4 billion to own 50% of a holding company, and the rest 50% will be owned by 3G Capital for another $4 billion. Berkshire will invest another $8 Billion in preferred stock with a 9% yield.
However, the preferred stock has a couple of major sweeteners for Berkshire, the preferred stock will be redeemed in the future at asignificantly higher priceand also comes with warrants that enables Berkshire to buy 5% of the holding company’s stock for a nominal price.
6. Floating on Money
The rocket fuel behind Berkshire Hathaway’s engine has always been the float coming in from its insurance businesses. And consequently, it is the reason why the firm is undervalued. Buffett states it succinctly,
“So how does our attractive float affect the calculations of intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were unable to replenish it. But that’s an incorrect way to look at float, which should instead be viewed as a revolving fund. If float is both costless and long-enduring, which I believe Berkshire’s will be, the true value of this liability is dramatically less than the accounting liability. A partial offset to this overstated liability is $15.5 billion of “goodwill” that is attributable to our insurance companies and included in book value as an asset.”
7. Local Newspapers Still Reign Supreme
In the last fifteen months, Berkshire acquired 28 newspapers for $344 million. This may seem surprising to some investors, due to Buffett’s own acknowledgement that newspapers are in a secular decline in terms of circulation, ad revenue and profits. However, the reason why he bought newspapers are due to the economics of local news companies. In his own words, Buffett states,
“If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end.”
Buffet does expect most of his daily newspapers to be profitable for a long time to come. Both he and Charlie Munger like the newspaper business, and will continue to look for more newspapers to acquire at a low P/E multiple.
The Takeaway
With a line-up of some of the best companies and assets in the world, along with the best possible management, it is certain that Berkshire Hathaway will beat the market over long periods of time. The company never underperformed the S&P 500 over a five- year stretch, and it is likely to remain that way.
The article Investing Themes from Warren Buffett originally appeared on Fool.com and is written by Ishfaque Faruk.
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