- Berkshire Hathaway and its subsidiaries engage in business activities including insurance, utilities, freight rail transportation and manufacturing
- Making acquisitions has helped it to become one of the largest companies in the world
Jonathan Mills, co-founder of and portfolio manager at Metropolis Capital which runs a portion of Alliance Trust’s (ATST) portfolio, explains why he invests in US multinational conglomerate Berkshire Hathaway (US:BRK.B).
"Under chief executive officer (CEO) Warren Buffett, Berkshire Hathaway and its subsidiaries engage in diverse business activities including insurance and reinsurance, utilities and energy, freight rail transportation, manufacturing, retailing, and services.
"The growth of Berkshire Hathaway into one of the largest companies in the world has been entirely due to a series of sensible investment decisions. It has largely been built up by acquisitions and, every time Buffett has acquired a company, it has been because he likes both the business and its management. When he makes an acquisition, he does not do conventional due diligence but rather meets the top managers and then decides if they are trustworthy.
"Unlike typical corporate acquirers, Buffett never plans to replace managements. But occasionally, when things have gone seriously wrong, such as with Dexter Shoe which fell foul of cheap, foreign competition, he has made changes. But this has always been with extreme reluctance after the initial acquisition.
"For decades, Buffett has made a virtue of running businesses very differently to others. He trusts each subsidiary’s managers to make their own decisions, only giving them the guidance that they should manage their company along the highest ethical lines – as if they and their family were going to own it for the next 100 years. Buffett believes that businesses will be run efficiently and to high ethical standards if he focuses their managers on the importance of maintaining a sterling reputation and thinking about their business over the very long term.
"This extreme hands-off approach has worked extraordinarily well over the years. Unlike other companies, particularly in the finance sector where short-term incentives have often led managers to make poor decisions, Berkshire Hathaway has maintained a very good reputation in the different industries in which it operates while generating outstanding returns for shareholders.
"Berkshire Hathaway 'A' shares, which have never been split, trade at around $480,000 (£388,973) each. This represents a 64,000 times return since Buffett bought his initial stake in 1962 for $7.50 a share – an annual internal rate of return of 21 per cent. So if you had invested, say, $10,000 alongside Buffett it would now be worth about $640m."
