Business Insight Zone

Today’s Company of the Day is Berkshire Hathaway.

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Let’s play what-if: it’s 1965, you’re a young person looking to buy a good stock, and you have $19 burning a hole in your pocket. You take a flyer on Berkshire Hathaway, a little textile company that’s come under new management. Maybe you’ve heard something good about the smart new CEO, Warren Buffett, and his business partner Charles Munger. You tuck aside the stock certificate, join the Foreign Legion, and forget all about Berkshire Hathaway. You miss the intervening 42 years, in which the company outperforms the S&P 500 index by a compounded annual margin of 11%. You miss the myriad acquisitions of companies from General Re to Acme Brick. When you return from the Foreign Legion to take your well-deserved retirement, you find your old Berkshire stock certificate and decide to cash it in. When you sell it at the close of business on August 31, 2007, you reap $118,390. It’s fun to pretend, huh?

How have Buffett and Munger made so much money for their devoted shareholders and for themselves? (Buffett’s fortune is far larger, but Munger is easily a billionaire in his own right.) They have profited not just from unusual acumen in valuing assets, but from unusual discipline in maintaining their principles in all weather. If they don’t understand how to value an asset, or can’t get it at a discount to its value, they simply won’t buy it, regardless of how sexy it may seem to the markets at the time. Because of this approach, Berkshire sat out the tech-driven IPO boom of the 1990s, as well as the private equity boom of the past couple of years. Of course, they also avoided the dot-com bust, and now that the real estate and credit markets have soured, Berkshire is on the prowl for bargains again — with $50 billion of its own cash at its disposal.

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Category: Company of the Day, Deals, Economics, Finance & Real Estate