What is Berkshire Hathaway — a concise explainer
Berkshire Hathaway is a large, diversified holding company headquartered in Omaha, Nebraska. A holding company is a corporation that owns controlling stakes in other businesses rather than focusing on a single operating line. Berkshire’s portfolio includes wholly owned private businesses (for example, insurance companies and consumer brands) and sizable minority stakes in public corporations. Warren Buffett has led the company since the mid-1960s and has shaped its strategy around acquiring durable businesses and investing public equity capital for the long term.
Key facts (from the supplied material)
– Founded as a textile business, Berkshire was taken over by Warren Buffett in 1965 and transformed into a holding company.
– Major wholly owned subsidiaries include large insurance businesses plus companies such as Duracell, Dairy Queen, Fruit of the Loom, NetJets and others.
– Berkshire also holds large public-equity positions (examples in the portfolio include Apple, Bank of America and UPS). As of Dec 31, 2022, the public-equity portfolio was valued at more than $346 billion.
– The company’s shares trade on the NYSE in two classes: Class A (BRK.A) and Class B (BRK.B). Class A shares carry much greater voting power and have never split, which historically kept BRK.A share prices very high.
– Insurance “float” — money held by insurance subsidiaries before claims are paid — has been a key source of capital that Berkshire invests elsewhere.
– From 1965 through 2021, Berkshire’s compounded annual return averaged about 20.1% per year versus the S&P 500’s 10.5% per year over the same period.
– Succession: Berkshire has identified leadership successors for different parts of the business; Greg Abel is widely cited as the heir apparent for non-insurance operations, while several senior managers oversee insurance activities.
Definitions (simple, practical)
– Holding company: An entity that owns other companies’ equity and controls their operations through ownership rather than running day-to-day operations itself.
– Insurance float: Premiums and reserves held by insurers that can be invested until claims must be paid; float represents a low‑cost source of investable capital when claims are paid later.
– Value investing: An investment approach that seeks securities whose market price is below the investor’s estimate of intrinsic value; the expectation is that market prices will eventually rise to reflect that intrinsic value.
– Class A share (BRK.A): A share class that typically carries more voting rights than lower classes (like Class B) and often is used to concentrate control with management or founding owners.
Why Berkshire’s structure matters
– Diversification across wholly owned businesses and a large equity portfolio reduces dependence on any single industry.
– Owning insurance companies creates a recurring source of float that can be deployed opportunistically.
– High voting-power Class A shares allow long-term management control, which has enabled Buffett to follow a consistent investment approach.
Checklist: what to check when researching Berkshire Hathaway
– Market capitalization and recent share-price behavior (BRK.A and BRK.B).
– Size and composition of the publicly traded stock portfolio (latest 13F filings and annual reports).
– Major wholly owned subsidiaries and how profitable they are
– Profit drivers of each major segment (insurance underwriting, reinsurance, BNSF/rail, utilities, manufacturing, service businesses, retailing, investment income). Look for trends in revenue, operating margin, and return on invested capital (ROIC). ROIC = NOPAT / Invested Capital, where NOPAT is net operating profit after tax.
– Insurance float and underwriting metrics. Float = premiums received but not yet paid out (liability you can invest). Check underwriting profit/loss and the combined ratio (combined ratio = loss ratio + expense ratio). A combined ratio below 100% indicates underwriting profit before investment income.
– Leverage, debt structure, and liquidity. Review long-term debt, maturities, borrowings at insurance subsidiaries, and available cash. A simple leverage check: Debt/EBITDA or Debt/Total Capital.
– Shareholder-payout policy. Berkshire historically pays no dividend; instead it may buy back Class A/B shares. Track repurchases and rationale.
– Concentration risk in the public equity portfolio. Large positions (e.g., top 5 holdings) can dominate returns. Use 13F filings (see step below) to measure concentration.
– Governance and succession planning. Class A shares carry superior voting power; assess disclosures about management succession and board independence.
– Accounting quirks and non-GAAP figures. Berkshire reports “operating earnings” separate from net income driven by unrealized gains/losses on securities—know which number you use in valuation.
Quick reference checklist to pull before you form a view
1. Latest market cap and share counts for BRK.A and BRK.B (exchange listings or company filings).
2. Latest annual report (Form 10-K) and most recent quarterly report (Form 10-Q).
3. Latest 13F filing (quarterly U.S. institutional holdings report) for public-equity positions.
4. Insurance float and combined ratio history (multi-year).
5. Cash, equivalents, and available liquidity.
6. Debt schedule and maturities.
7. Share repurchases and outstanding share-change history.
8. Major wholly owned subsidiary income statements (BNSF, GEICO, Burlington resources etc.).
9. Chairman’s/CEO’s letter (Buffett’s annual letter offers qualitative context).
10. Any material regulatory, tax, or litigation disclosures.
How to use a 13F to check concentration — step-by-step (13F: quarterly institutional holdings report)
1. Locate the 13F: search SEC EDGAR for “Berkshire Hathaway” and filter for 13F-HR filings, or use a data provider.
2. Extract each holding’s market value (reported in thousands). Sum the values to get the reported long-equity portfolio total.
3. Compute concentration: % of portfolio in a given holding = (holding market value / total 13F market value) × 100.
Worked numeric example (illustrative):
– Suppose 13F lists Apple at $100,000 (thousands) and total 13F value = $250,000 (thousands).
– % concentration = 100,000 / 250,000 = 0.4 → 40% of the reported stock portfolio.
Note: 13F shows U.S.-listed equities only, reported at quarter-end market values; it does not include private businesses or some derivative positions.
A simple owner-earnings check (Buffett-style cash proxy)
Definition: Owner earnings ≈ reported net income + non-cash charges (e.g., depreciation) − capital expenditures − working capital increase + any one-time adjustments. Use as a cash-based profitability measure for valuation.
Worked numeric example (illustrative):
– Net income: $10,000
– Depreciation & amortization: $1,500
– Capital expenditures (capex): $2,000
– Increase in working capital: $200
– Owner earnings = 10,000 + 1,500 − 2,000 − 200 = $9,300
This owner-earnings figure is a starting point for estimating sustainable cash flow available to shareholders; adjust for non-recurring items and business-specific needs.
Floating-point valuation checks (fast sanity tests)
– Book value per share: Book value / shares outstanding. Buffett often references book value growth as a historical shorthand for intrinsic progress. Note: Book value mixes accounting rules and may diverge from economic value for investment firms.
– Price-to-book (P/B) = Market price / Book value per share. Use as a cross-check versus peers, not a sole decision metric.
– Operating earnings per share (OEPS): use company’s operating earnings attributable to shareholders divided by diluted shares; compare OEPS growth to share-count changes.
Risks specific to Berkshire Hathaway
– Concentration in a few large equity holdings can swing investment income materially.
– Insurance industry cyclicality and catastrophic loss exposure.
– Management and succession risk—long-term performance has been linked to a small leadership team.
– Accounting volatility from mark-to-market of securities.
– Regulatory, tax, or anti-trust changes that could affect operations (utilities, rail, insurance).
How to monitor Berkshire over time (routine checklist)
– Read the annual letter to shareholders (Buffett) each February. It highlights strategy and major moves.
– Review Form 10-K annually for consolidated results and risk disclosures.
– Check quarterly 10-Qs for operating trends and repurchase activity.
– Scan 13F each quarter for public-equity shifts.
– Watch insurer combined ratios and float growth in quarterly/annual filings.
– Track cash & equivalents and borrowings in quarterly balance sheets.
Sources for primary documents and reliable data
– Berkshire Hathaway — Annual Reports and Letters to Shareholders: https://www.berkshirehathaway.com
– U.S. Securities and Exchange Commission (EDGAR) — company filings, including 10-K/10-Q and 13F: https://www.sec.gov/edgar
– Investopedia — Berkshire Hathaway overview and definitions: https://www.investopedia.com/terms/b/berkshire-hathaway.asp
Additional useful references
–
– Morningstar — company financials, fair-value estimates and analyst reports (useful for ratios and historical metrics): https://www.morningstar.com/stocks/xnys/brk-b/quote
– Yahoo Finance — quick quotes, historical price/volume and basic financials: https://finance.yahoo.com/quote/BRK-B
– S&P Global / company pages — industry context and credit metrics (subscription may be required): https://www.spglobal.com
Practical monitoring & analysis — condensed checklists
Weekly (5–15 minutes)
– Price & volume: note any unusual moves or news headlines.
– Cash & equivalents snapshot: check quarterly/10-Q balance if a new filing is out.
– Insider/repurchase headlines: search company press releases or SEC Form 4 (insider trades) and 8-K (material actions).
Monthly (15–45 minutes)
– Read a short summary of the latest quarter (company press release and major headlines).
– Scan major subsidiary headlines (e.g., GEICO, BNSF, Berkshire Hathaway Energy).
– Check analyst notes if you use them; note changes in target ranges or risk views.
Quarterly (30–90 minutes; after 10-Q/earnings)
– Review consolidated results and management commentary in the quarterly press release.
– Check insurer combined ratio and premium growth:
– Define combined ratio: (losses + loss-adjustment expenses + underwriting expenses) / earned premiums. A ratio 100% indicates underwriting loss.
– Example: losses $15bn + expenses $3bn = $18bn; earned premiums $20bn → combined ratio = 18/20 = 0.90 = 90%.
– Monitor float: insurance float = premiums collected that have not yet been paid out as claims. Track year-over-year change and ratio to invested assets.
– Verify repurchase activity: aggregate share buybacks in the period and remaining board authorization (if disclosed).
– Check debt and short-term borrowings on the balance sheet.
Annual (deep dive; 1–3 hours)
– Read Buffett’s annual letter and the full 10-K.
– Run a sum-of-the-parts (SOTP) check: value publicly traded equities at market cap, estimate private-operating businesses using reasonable multiples or owner-earnings, and add cash/minus net debt.
– Reconcile book value per share vs. market cap per share and note reasons for divergence (intangible assets, unrealized gains/losses, market sentiment).
Valuation tips and simple calculations
1) Owner earnings (a cash-based profit measure)
– Formula (simplified): Owner earnings = Net income + Depreciation & amortization − Capital expenditures − Increase in working capital + Other non-cash charges.
– Worked example: net income $25bn, D&A $3bn, capex $2bn, ΔWC +$1bn → owner earnings = 25 + 3 − 2 − 1 = $25bn.
2) Effect of buybacks on EPS (illustrative)
– If EPS = $10 and shares outstanding = 1,000m, repurchase reduces shares by 2% (new shares = 980m).
– New EPS ≈ old EPS / (1 − 0.02) = 10 / 0.98 ≈ $10.20 (≈2% EPS boost, ignoring margin effects).
3) Quick float-growth rate
– Float growth rate (%) = (Float this period − Float prior period) / Float prior period × 100.
– Example: float grew from $40bn to $44bn → growth = (44 − 40)/40 = 0.10 = 10%.
Risks and watch items (concise)
– Insurance underwriting deterioration (combined ratio >100% persistently).
– Large unrealized losses on public equities during market stress.
– Concentration risk in major holdings (single-stock exposures).
– Management succession and governance changes.
– Leverage at the subsidiary or holding level (commercial paper, bank lines).
Data sources & document checklist (what to download)
– Annual report + Buffett letter (Berkshire Hathaway web site).
– Latest 10-K and two most recent 10-Qs (SEC EDGAR).
– Recent 13F filings for public-equity exposures (SEC EDGAR).
– Press releases and 8-Ks for major transactions.
– Market data (price, volume, dividends if any) from Yahoo Finance or your broker.
How to set up a routine (example schedule)
– Add calendar reminders: quarterly after 10-Q/10-K release, Buffett letter (February).
– Keep a one-page tracker with:
– Key headline numbers: total market capitalization (A and B separate), shares outstanding (A and B), cash & short-term investments, total investments (market value), net debt (if any), insurance float.
– Top 10 equity positions (name, ticker, market value, % of investment portfolio).
– Recent 12-month operating earnings (or EBIT/EBITDA) for major wholly owned businesses or segments.
– Last 4 quarters’ investment gains/losses (realized + unrealized).
– Share repurchases and issuance in the past 12 months.
– Succession / governance notes (CEO/CFO status, any 8-Ks flagged).
– Recent material M&A or dispositions (date, price, effect on cash).
– Red-flag notes: large unrealized markdowns, concentrated single-stock exposure, new leverage, or regulatory/underwriting losses.
– Next review date and items to collect before that review (10-Q/K, 13F, press releases).
Quick review checklist (use every quarter)
1. Confirm filings: 10-Q or 10-K posted — download and scan MD&A and risk factors.
2. Update market values: total investment portfolio and top 10 holdings from latest 13F/market data.
3. Recompute cash & short-term investments and available liquidity lines.
4. Check float trend and underwriting profit/loss; note any rising combined ratio (insurance).
5. Note share repurchases or issuance and update share counts.
6. Look for governance changes, material transactions (8-K), or management commentary (Buffett/Munger letters/interviews).
How to estimate a simple intrinsic value (sum-of-the-parts)
Formula (simple, transparent):
Intrinsic value per share = (Value of operating businesses + Market value of public investments + Cash & short-term investments − Net debt − Minority interests) / Shares outstanding
Step-by-step
1. Value operating businesses: use recent EBIT or EBITDA × chosen multiple. For a conservative baseline, use industry median multiples or a discounted-earnings approach. Document multiple choice and rationale.
2. Use market value for public equity positions (from exchange prices).
3. Cash & short-term investments: use reported book value.
4. Subtract net debt (total debt − cash if you prefer enterprise view).
5. Divide by shares outstanding (use B shares or convert A to B per official ratio).
Worked numeric example (rounded, hypothetical)
– Cash & short-term investments: $150 billion
– Public investments (market value): $300 billion
– Operating businesses: trailing EBITDA = $20 billion; chosen multiple = 12× → implied value = $240 billion
– Net debt: $10 billion
– Shares outstanding (B-share equivalent): 2,000,000,000
Intrinsic value per B-share = (150 + 300 + 240 − 10) / 2,000,000,000
= $680 billion / 2,000,000,000 = $340 per B-share
Assumptions to note: the multiple (12×) is subjective; operating earnings should be normalized for cyclical swings; convert A to B share ratio if needed. Replace hypothetical numbers with current figures in your one-page tracker.
Scenario analysis (simple three-point)
– Base case: use current market values and conservative multiples; probability 50%.
– Downside: reduce operating multiple by 20% and assume a 30% drop in public equities; probability 30%.
– Upside: increase operating multiple by 20% and assume 10% gain in public equities; probability 20%.
Compute each scenario intrinsic value, then expected value = sum(probability × scenario value). This highlights sensitivity to valuation assumptions and equity volatility.
Red flags and monitoring triggers
– Insurance combined ratio > 102% for two consecutive years (underwriting losses eating float).
– Concentration: single public-equity holding > 30% of investable public portfolio (raises single-stock risk).
– Cash declines > 20% without clear strategic use (could signal aggressive M&A or stock buybacks when valuation unclear).
– Large unrealized losses (>25% of investment portfolio) persisting with no plan or disclosure.
– Sudden changes to executive succession plans or unexplained departures.
Using 13F and SEC filings efficiently
– 13F lists long U.S.-listed equity positions (quarterly). Use it to detect changes in weighting and concentration shifts.
– 10-Q/10-K contain detailed segment results, float discussion, contingent liabilities, and committed financing lines.
– 8-Ks and press releases flag material transactions and governance events; set alerts for these filings.
Practical maintenance workflow (example weekly/monthly/quarterly)
– Weekly: price-check top 10 equity holdings; quick news scan for Berkshire and top subsidiaries.
– Monthly: update cash and market-value snapshots; note insider transactions or 8-Ks.
– Quarterly: full update after 10-Q/10-K and 13F; recompute intrinsic value and record variances vs prior quarter.
Sources (reference & further reading)
– Berkshire Hathaway — Letters to Shareholders and Annual Reports: https://www.berkshirehathaway.com
– U.S. Securities and Exchange Commission — EDGAR filings (10-K, 10-Q, 13F, 8-K): https://www.sec.gov/edgar
– Investopedia — Berkshire Hathaway overview: https://www.investopedia.com/terms/b/berkshire-hathaway.asp
– Yahoo Finance — BRK.B and BRK.A market data pages: https://finance.yahoo.com
– Morningstar / company filings for operating-segment financials (search company name on morningstar.com or via EDGAR)
Educational disclaimer
This is educational information about analyzing a multi-business holding company. It is not personalized investment advice or a recommendation to buy or sell securities. Verify current data from primary filings before making decisions.