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What is it like to be owned by Warren Buffett? (stanford.edu)
84 points by Oatseller on Nov 5, 2015 | hide | past | favorite | 20 comments



This is partially selected for based on the kinds of businesses Berkshire invests in. They love high free-cash-flow businesses with significant regulatory or operational barriers to entry; the cash flow is then available to finance other acquisitions when opportunities arise, at a very low cost of capital.

In those kinds of businesses, there tend to be easy-to-understand performance metrics that can actually be optimized for on a longer term. The bet on the business model has already happened and there is limited ability to make company-risking bets or engage in empire-building.

One notable thing about Berkshire businesses is that internally they tend to be extremely "thrifty". Their insurance operations have one of the lowest expense ratios (operational expenses as a fraction of premiums) in the business, and are some of the only ones to actually make a profit off of the premiums directly rather than off of investing their float.


wait, insurance companies don't usually make an actual profit directly from premiums?

what a world we live in, that's an eye-opener for me.


They typically pay out more than they take in as premiums. But the time from taking money in to paying it out is in years to decades, so they sit on a mountain of money. Warren made the bulk of his money by using that money wisely.


They typically make money from investing the money in between when it's received, and when they pay out claims - imagine a life insurer holding the cash between the start of the policy and the insured's death.


If your insurance provider can make money without investing the premiums, then I'd say you're paying too much for premiums.


> wait, insurance companies don't usually make an actual profit directly from premiums?

Well, it depends how you measure it.

In a basic model an insurance company's profit is:

Profit = Premiums + Investment Returns - Claims - Expenses

Talking about "profit from premiums" doesn't really make sense, that concept isn't defined. So you can't really say that "insurance companies don't usually make profit directly from premiums".

Fiatmoney is simply claiming that Bekshire's insurance operations have Premiums > Claims + Expenses.


thank you for the breakdown.


I think it's just an artifact of inflation/growth. They make a profit directly if you measure in constant dollars, it's just that by the time they pay out they're paying out more nominal dollars than they took in in premiums.


If you want some of those mythical and much coveted "constant dollars", you typically need to sell dollars and buy some sort of appreciating investment.


I think most people have progressed beyond "stuffing cash under the mattress" as an investment model these days.


It's one of the reasons the most instance companies have been mutually owned until recently.

Now they've mostly turned into cash generators for investment banks.


Maybe it's just me, but I find it obvious that they did better because they focused on long term goals, instead of short term profits.


It's not just you, it's their entire investment strategy.

I did some study of Buffett/BH/Graham in college and resoundingly they do "value investing" which is predicated on the notion that true gains are made in longevity. Highly recommend the intelligent investor as a starting point in understanding the BH ethos.

That said, BH has done some short term deals - and was taken to task in 2008 for their involvement in CDO trading. So it's not all peaches and cream.


CDO's are actually a useful tool for highly competent investors. However, the overwhelming majority of investors aren't.

The reality is 10's of trillions in assets are managed by people who don't know what there doing and have little incentive to learn. Because, when your playing with other peoples money managing more has better ROI than managing well.


Same here. We saw the same with GE and many large tech companies for a while. The only exception that made sense was when companies made sacrifices for growth to put themselves on the right side of eventual monopoly or oligopoly. Even that's long-term thinking in its own regard as it's a setup for future plays.


For those interested, I highly recommend reading Berkshire Beyond Buffet (http://www.amazon.com/Berkshire-Beyond-Buffett-Enduring-Valu...), which talks a lot about all the individual businesses before & after being acquired. A little repetitive, but good reading.



So companies that are acquired by Berkshire Hathaway get improved management 'for free' (in that there was no HR/recruiting work required). Sounds like a good deal if you have pre-acquisition ownership in one of them.


His letters to shareholders are worth a read: http://amzn.to/1XTv2Xj


This is a timely comparison to how we could imagine Alphabet/Google in the future. Provide a shield from the market to allow long term thinking.




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