Berkshire Hathaway and Buffett… I suppose that’s how a lot of investor stories begin. Mine certainly did. Though technically, my very first step was picking up Security Analysis from the local library. Probably the worst possible entry point. I barely understood a word. Compared to that, The Intelligent Investor felt like a beach read.

Around the same time, I stumbled upon those grainy old YouTube videos from Omaha, where Buffett patiently explains the investing world for hours, and Munger chimes in with a single devastatingly sharp comment, followed by, “I have nothing to add.”

Funny enough, I embraced Buffett and Munger’s philosophy and investing style, but never actually studied Berkshire Hathaway itself in much depth. Maybe some of you are in the same boat.

If that’s the case, today you’ll finally get to know the business behind the philosophy. And if you already know Berkshire inside and out, well… you might want to stay for some anecdotes.

Let’s dive in!

— Daniel

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We give each other feedback on research, share high-conviction ideas, and join weekly calls to discuss investments and host guest speakers, from industry insiders to seasoned investors, who share their strategies, investments, and mental models.

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Berkshire Hathaway: Buffett’s Empire

From a Failing Textile Business to a Trillion Dollar Conglomerate

There are plenty of stories to tell about Berkshire Hathaway, but I want to keep the focus on the business side. Berkshire’s history is part of that, though. It’s not only a timeline of Buffett’s investments, but also his development as an investor and the evolution of the company itself. So I’m taking the liberty to tell some of those stories.

Let’s start with how Buffett got interested in acquiring a failing textile business in the first place. At the time, he was what he later called a “cigar butt” investor, looking for companies that were, in his words, “kind of pathetic companies that sell so cheap that you think there’s one last good puff in it.”

In Berkshire Hathaway’s case, that last puff was a share repurchase program. As the company struggled and began closing plants, the liquidation proceeds were used to buy back shares. For Buffett, that was enough to make it look like a bargain worth grabbing.

In 1962, he began buying Berkshire stock at nearly a third of book value, betting that the company would keep selling plants and using the proceeds to repurchase shares. And that’s exactly what happened. Eventually, Seabury Stanton, Berkshire’s CEO, reached out to Buffett, who by then owned about 7% of the company, to ask at what price he’d be willing to sell his shares.

Buffett’s entry price had been $7.50, so he told Stanton he’d part with his shares for $11.50. A quick 50% gain — not a bad IRR. Seabury agreed, and Buffett assumed the Berkshire chapter of his life was soon to be closed. Little did he know, it had just begun.

When the day came and the offer letter finally arrived, the price wasn’t $11.50. It was $11.37. And that 13 cents made all the difference. As every Buffett follower knows, he values promises and trust above almost anything else. To Buffett, Seabury had broken his word. And instead of selling, Buffett doubled down by buying even more shares until he eventually controlled more than 30% of the company.

Being one of the largest shareholders, Buffett seized control of the company in a board meeting and promptly fired Seabury. Looking back years later, he described the episode with more self-awareness: “Through Seabury’s and my childish behavior, he lost his job, and I found myself with more than 25% of my partnership's capital invested in a terrible business about which I knew very little. I became the dog who caught the car.”

Building Berkshire Hathaway

While Buffett’s entry into Berkshire wasn’t exactly a masterstroke, the worst mistake came right after. It was his first acquisition through Berkshire Hathaway: a small Omaha-based insurer called National Indemnity, founded and run by a friend of his.

That friend wanted to sell and naturally turned to Buffett, the local insurance expert. For reasons Buffett still can’t explain, he decided to buy National Indemnity through Berkshire Hathaway instead of his investment partnership.

But at the time, Buffett owned just 60% of Berkshire. That meant 40% of National Indemnity, a high-quality insurance company that would become the cornerstone of Berkshire’s empire, ended up in the hands of Berkshire’s legacy shareholders rather than with Buffett’s partners and himself. By Buffett’s own calculation, and his math is usually pretty good, that single decision has cost him roughly $200 billion over the years, once you account for the compounding of capital since then.

The Business Segments of the Berkshire Empire

The Insurance Business

Although the National Indemnity acquisition didn’t start out perfectly, it laid the foundation for one of Berkshire’s most important business segments: insurance.

The key concept here is “float.” Float has financed Buffett’s investments for decades. For anyone unfamiliar, float is money that technically belongs to policyholders but sits on the insurer’s balance sheet in the meantime. Customers pay premiums upfront, long before their claims come due, and that timing mismatch leaves insurers with piles of investable cash.

Most companies just earn a bit of interest on float. Berkshire put it in the hands of the greatest capital allocator of all time. And as you can imagine, that turned out to be a pretty profitable value proposition for Berkshire. There has never been a need to fund the investments through new equity or debt. Float was all Berkshire needed.

Because the model worked so well, Buffett kept buying insurance companies to expand Berkshire’s access to float. The most famous of these acquisitions is Geico, which, funnily enough, was also Benjamin Graham’s most successful investment ever.

It’s a bit ironic that the father of value investing, who in many ways created the cigar butt approach, had most of his success with a company that embodied quality long before value investing and quality stocks were seen as compatible.

Geico also highlights one of Buffett’s greatest strengths: patience. He first encountered the company in 1951, as a college student. He invested half his net worth, sold a year later for a quick 50% gain, and moved on. But 25 years later, the opportunity came around again. This time, Buffett bet big, buying shares through Berkshire. He kept adding over the years until 1995, when Berkshire bought Geico outright.

I won’t cover every insurance acquisition here, but the sheer scale of Berkshire’s float shows how transformational the strategy has been. In 1970, float stood at about $39 million. Twenty years later, it had grown to $1.6 billion. By the end of last year, it had reached an astonishing $164 billion. That mountain of capital has been compounding under Buffett’s watch ever since.

Today, Berkshire’s insurance empire includes Geico, Berkshire Hathaway Primary Group, Berkshire Hathaway Reinsurance Group, General Re, Berkshire Hathaway Specialty Insurance, and a collection of smaller players. All of them fall under the leadership of Ajit Jain, one of Buffett’s most trusted partners.

In 2024, insurance made up almost 30% of Berkshire’s revenue. And unlike most insurers, Berkshire has a long track record of actually generating underwriting profits. That may sound like a prerequisite for every business, but many insurance companies operate at an underwriting loss or very slim margins.

It’s important to distinguish between the underwriting profit and the overall contribution of Berkshire’s insurance business. On the surface, underwriting profit looks fairly modest at about $9 billion in 2024. For a company worth over a trillion dollars, that doesn’t move the needle as much as you’d think.

But underwriting is only half the story. The real power lies in the investment portfolio funded by the insurance float, all that premium money collected upfront and invested long before claims are paid. Last year, those investments generated more than $40 billion in investment gains and over $13 billion in investment income (dividends and interest on bonds, etc.). Put the two together, and suddenly insurance (underwriting plus investment income) makes up the vast majority of Berkshire’s total profits.

While Berkshire’s underwriting profits have been exceptionally strong over the past two years, those margins are unlikely to be sustainable. A useful way to measure profitability in insurance is the combined ratio — the sum of incurred losses and operating expenses divided by net earned premiums. A ratio under 100% signals an underwriting profit, while anything over 100% indicates a loss.

In 2024, Geico posted a combined ratio of about 80%, which translates into an extraordinary 20% underwriting margin. That surge came from a perfect mix of aggressive rate hikes that boosted premiums per policy, a meaningful drop in accident frequency, and a leaner cost structure after cutting advertising and improving efficiency.

Of course, these tailwinds won’t last forever. Accident frequency is outside Geico’s control, and there are natural limits to how far prices can be pushed. So, over time, underwriting margins are more likely to settle back into the mid-single-digit range.

Still attractive, but far less “spectacular” than the recent highs. Ultimately, the role of the insurance business is to fund investments, and as such, it’s incredibly valuable to Berkshire, even more so than our sum of the parts will suggest at the end.

The Energy Business

We’ll come back to the insurance business in the valuation section, but for now, let’s turn to Berkshire’s next big pillar — the energy business.

At first glance, Buffett’s entry into the sector looks surprising. He has always favored businesses with high returns on capital and limited reinvestment needs. Two qualities the utility industry certainly doesn’t have. Yet in 1999, he bought MidAmerican Energy for about $2 billion in cash. Perhaps it was one of the few places he still saw value during the tech bubble.

Interestingly, just a year earlier, at a talk at the University of Florida, a student asked him about utility and energy stocks. Buffett pointed out two things. First, the industry offers the chance to deploy enormous sums of capital, and second, it has a monopoly-like market structure that can be very attractive.

But he also admitted he didn’t yet fully understand the industry and was cautious about the risks of regulation. And, as he often stresses, he would need to find the right people to work with. Apparently, he found the right people in MidAmerican, and by then, he was also more confident about the industry’s direction than he had been just a year earlier.

At the top of MidAmerican Energy were David Sokol and Walter Scott. For a time, Sokol was even viewed as a potential Buffett successor. That ended abruptly, though, when he resigned after what Buffett called “unethical behavior,” when Sokol had purchased shares in a company he later recommended to Berkshire as an acquisition target.

Despite Sokol’s departure, Buffett’s eventual heir still came up through the energy business. Greg Abel was instrumental in expanding and shaping Berkshire Hathaway Energy into what it is today.

Today, BHE manages over $140 billion in assets and ranks among the largest owners of wind and solar power in the U.S. Back in 2005, roughly 70% of its power generation came from coal. That share has since dropped below 30%, and the company has committed to retiring all coal plants within the next 25 years.

When Shawn and I were at this year’s shareholder meeting, there was a question about why Berkshire still relies on coal at all. But honestly, looking at the numbers, I think they’ve done a pretty solid job steering the business toward renewables and into the future.

Looking at the financials, BHE actually seems like a relatively small piece of Berkshire. It contributes only 5–6% of revenue. Yet, if we look at Buffett’s preferred metric of operating earnings, which strips out capital gains and losses from the investment portfolio, it contributes about 8%.

What makes BHE different from many other companies within Berkshire, though, is how it handles those earnings. None of its three major utilities — MidAmerican, Nevada Energy, or PacifiCorp — has ever sent a single dollar of profits back to Omaha. Instead, every dollar is reinvested into the business, either to grow the capital base or to fund new projects directly.

That gives BHE a huge competitive edge. Utilities are not exactly known as glamorous investments, and most of them distribute a large chunk of profits as dividends, on average, about 75%. BHE, thanks to Berkshire’s backing, doesn’t have to. It can plow 100% of its profits back into expansion, while competitors can only reinvest a quarter of theirs.

It’s not a massive cash cow, but it gives Berkshire a way to deploy billions of dollars at high single-digit returns, steady, scalable, and backed by strong barriers to entry that make those returns highly certain.

The Railroad Business

This business segment shares many of the same traits as energy: a highly concentrated market, heavy capital requirements, and steep barriers to entry. Berkshire owns the railroad company Burlington Northern Santa Fe (BNSF), the largest freight railroad in the U.S. and one of just six Class I railroads. To qualify as Class I today, a carrier must generate over $1 billion in revenue.

The market wasn’t always as concentrated, though. Back in 1900, there were 132 Class I railroads, and the market was fiercely competitive.

BNSF is another example of Buffett’s patience. He tracked the industry for decades but, as you know by now, avoided investing because of cutthroat competition that made it nearly impossible to pick a winner. The industry was also highly regulated back then.

Over time, the landscape changed. By the mid-2000s, consolidation had reshaped the system, leaving just a handful of large players and creating the kind of oligopolistic market structure Buffett prefers.

His investment thesis on BNSF was pretty straightforward. As long as the American economy grows, so will the railroad. Moving goods by rail is efficient, cost-effective, and more environmentally friendly than many alternatives. In other words, not much stands in the way of the long-term case for BNSF.

An interesting link between Berkshire’s energy and railroad operations is coal. While Berkshire Hathaway Energy has steadily transitioned away from coal toward wind and solar, coal has long been and still is, to some extent, a significant part of what BNSF hauls. Years ago, Buffett was asked whether he worried about declining coal volumes. In his usual calm manner, he said he wasn’t. If they transport less coal, they’ll transport more of something else.

And he was right. Coal shipments fell 18% from 2023 to 2024, yet BNSF still posted mid-single-digit growth, thanks to strength in consumer products more than offsetting the drop. Railroads may be tied to the broader economy, but they’re diversified through hauling everything from agricultural products to industrial goods to retail cargo.

In terms of returns, the profile looks a lot like the energy business: not spectacular, but steady mid- to high–single–digit returns. And with Berkshire sitting on its largest cash pile in history, about $350 billion, these reliable, capital-heavy businesses are accretive as long as they out-earn what cash would otherwise generate.

Berkshire’s Equity Portfolio

Speaking of that massive cash pile, it’s time to look at what most investors immediately associate with Buffett: the equity portfolio. As most of you will know, Buffett has been a net seller of stocks in recent years.

At the end of 2023, the portfolio was worth about $350 billion, with Apple alone making up a staggering 50% of the total. Today, the Apple stake has been more than halved, pulling the overall value of the portfolio down to around $250 billion.

Still a touch larger than my portfolio, but it shows that Buffett has struggled to find attractive opportunities. Most of the activity shows up in smaller positions that don’t really move the needle and are unlikely to be Buffett’s own trades anyway. After all, the portfolio counts 41 positions, although 85% of its value sits in just the top ten holdings.

A recent buy that made headlines was UnitedHealth. Buffett bought the company despite its current struggles with the former CEO stepping down, the company withdrawing guidance, and lawsuits hanging over its head. Still, Buffett bought the dip, and with a 40% run since the bottom, this might turn into another bigger winner for Buffett. Although this story hasn’t been told yet.

In our podcast, we’ve discussed other long-term Berkshire holdings that Buffett bought under similar circumstances — American Express being a classic example. For this newsletter, though, I’ll keep the focus on the business units, the financials, and the valuation. If you want to dive deeper into the portfolio stories, check out the full episode.

The Manufacturing, Service, and Retailing Business

In sheer scope, this is Berkshire’s largest collection of businesses. The segment spans everything from industrial giants to furniture stores and jet services, and in 2024, it generated more than $13 billion in profits, accounting for over a quarter of Berkshire’s total operating profit.

Many of the companies in this segment are well known among Buffett fans. We cover classics like See’s Candies and the Nebraska Furniture Mart with its legendary founder, Rose Blumkin, in the podcast, but what matters here is the common thread that pretty much all companies in this segment share.

They either operate in industries with relatively few competitors and high barriers to entry, or they’re led by founders and CEOs whom Buffett believes can consistently outcompete their rivals. Combine that with the financial flexibility of having Berkshire as a parent, and you get a collection of businesses in a remarkably strong position.

This part of the business is less insulated from economic cycles than Berkshire’s energy or railroad operations. A housing slowdown will hurt the homebuilders, and a recession will weigh on both retailers and manufacturers.

But again, their advantage is that being backed by Berkshire means no competitor has a better chance of surviving a recession or cyclical downturn.

People often talk about a “Buffett premium” for businesses owned by Berkshire. I’d argue that, if it exists at all, it’s justified by the structural advantages these companies enjoy under Berkshire’s umbrella.

Valuing Berkshire Hathaway

Usually, we turn to a DCF when valuing companies. Not because it’s flawless, but because it pairs well with the qualitative research we do — letting us test assumptions and zoom in on different parts of the business. With Berkshire, though, a DCF makes little sense. The company is too complex, and earnings in some segments are volatile enough that aggregating them risks missing the bigger picture. For Berkshire, a sum-of-the-parts valuation is the more useful approach.

That means starting with the balance sheet and then moving on to capitalized earnings for key operating businesses. By capitalized earnings, I simply mean taking the annual profit of a business and applying a reasonable multiple to estimate its value — essentially asking, “If this business keeps earning at this level, what would the whole company be worth?”

The first step is cash. I only count the cash listed under “insurance and other.” I exclude the cash tied up in BNSF, utilities, and BHE. These are capital-intensive businesses that reinvest their cash and earnings rather than sending them back to Omaha. And if Berkshire can’t use that cash directly, neither should we — at least not in this part of the valuation. Indirectly, it will show up when we value the earnings power of those businesses, since the cash is still being put to work.

After cash, the next step is to add the fixed-maturity securities Berkshire owns. Together, cash and bonds already account for more than a third of Berkshire’s current $1 trillion market cap.

The next big piece is, of course, the equity portfolio. Despite the significant net selling of recent years, it’s still worth over a quarter of a trillion dollars. About 22% of that sits in Apple, down from nearly 50% not too long ago, with the rest heavily concentrated in Bank of America, American Express, and Coca-Cola. Personally, I feel more comfortable with Berkshire taking some gains on Apple.

We haven’t yet done a deep dive on it here, but from where I sit, Apple doesn’t look like the most attractive risk-reward opportunity in today’s market.

Since Apple now makes up only 22% of the equity portfolio, I chose not to adjust its value in my sum-of-the-parts model. Of course, you can make this part as complex as you like. If you believe a major holding is significantly over- or underpriced, you can adjust the balance sheet value of Berkshire’s equity investments accordingly.

The one adjustment I do make is for deferred taxes on unrealized gains. If Berkshire were to sell its equity holdings, it would owe taxes on those gains. Using the standard corporate tax rate of 21%, that haircut comes to about $40 billion.

So far, that brings us to a valuation of roughly $580 billion — and we haven’t even accounted yet for the railroad and energy operations, or the equity method investments. Those are the investments that sit somewhat in between. Berkshire owns more than just a small stake, but not the entire business. Think of companies like Kraft Heinz or Occidental Petroleum.

Equity method investments are accounted for as if Berkshire owned the entire company. Instead of marking them to market, Berkshire records the carrying value of its ownership stakes. That figure reflects:

Initial cost of investment + Berkshire’s cumulative share of the investee’s net income (since acquisition) – Dividends received from the investee ± Adjustments (impairments, basis differences, goodwill amortization, etc.).

For the last twelve months, that carrying value came to about $25 billion.

Now let’s move to BNSF and Berkshire Hathaway Energy. Since these aren’t just investment assets on the balance sheet, we have to assign earnings multiples.

BNSF has an average annual earnings power of around $5 billion. Growth is modest, but the moat and stability of its cash flows justify a multiple of 15x, which implies a valuation of roughly $80 billion.

BHE has similar characteristics and a comparable return profile. Applying the same multiple results in a valuation of about $55 billion.

For context, when Buffett bought Greg Abel’s 1% stake in BHE in 2022, the deal implied a valuation of about $90 billion. That makes my valuation here look conservative. But just a year later, Berkshire acquired the remaining 8% to make BHE wholly owned — and that transaction implied a valuation closer to $50 billion, more than 40% below the earlier figure and much closer to our estimate.

What explains such a wide gap? I don’t believe for a second that Buffett gave Abel a premium on his shares. A more likely explanation is the growing impact of wildfires. In recent years, their intensity and frequency have risen sharply, along with the regulatory and financial risks for utilities. Buffett himself noted last year that some energy companies are effectively in “survival mode.” Against that backdrop, it’s not unreasonable to think wildfire risk drove the repricing of BHE.

This leaves us with two segments: insurance and manufacturing, service, and retailing. The latter generates about $13 billion in annual earnings. You could debate what multiple this group deserves, given the mix of cyclical businesses and steady brands. But partly for simplicity and partly because the economics here aren’t so different from the other core businesses, I apply a 15x multiple. That puts the segment’s value at around $200 billion.

To put the size of this segment in perspective, when I started researching Berkshire, the only company we own worth more than $200 billion was Alphabet. By now, Uber has joined that list, too. Still, it’s striking that Berkshire’s manufacturing, service, and retailing group alone is in that league.

Alright, that leaves us with the insurance business. We’ve already counted the assets tied to insurance, but we haven’t yet looked at the earnings power of its underwriting operations.

Since 2023, underwriting results have been unusually strong. I don’t expect those margins to hold. For my model, I assume the business reverts to more historical levels — closer to 5% underwriting margins.

With a complex business like Berkshire, full of moving parts, you inevitably end up making assumptions or adjustments that others might not agree with. Buffett himself once argued that Geico is probably worth more than its underwriting profit and float combined, given its margin profile and growth outlook. Depending on the lens you use, you may arrive at different conclusions — but the general direction should look similar.

I apply a 12x multiple to normalized insurance earnings. That’s roughly in line with the industry average. You could make a case for a higher or lower multiple, but I see 12x as fair. Perhaps even a bit conservative given Berkshire’s scale and competitive edge in insurance. So, at an assumed underwriting margin of 5% and a 12x multiple on earnings, the insurance business is valued at about $53 billion.

Now, as the last part of the model, we have to subtract the debt that Berkshire holds at the parent-company level. You’ll find it on the parents’ balance sheet: about $20 billion. After working through all the moving parts, that leaves us with a fair value of roughly $975 billion. Compared to today’s market cap, that suggests Berkshire is about 5–6% overvalued.

That said, I just gave you a song and a dance about how assumptions can sway the outcome. Different inputs, slightly different multiples, and you can nudge the number up or down. Overall, though, I’d say Berkshire looks fairly valued at the moment. And if you take the shortcut of comparing today’s price to Berkshire’s median historical valuation, you’d land at about the same conclusion.

Investment Decision

At current prices, you can’t expect Berkshire to dramatically outperform the market. At the same time, Berkshire is like a superior index – diversified, with no fees, and featuring some of the best capital allocators to ever live, sitting at the top. With $350 billion in cash, it offers both a lot of optionality and can serve as a placeholder.

Currently, we have a cash position of almost 50% in our portfolio. If you guys ask me, Berkshire will definitely outperform cash. So we decided to add it as a placeholder that can guarantee us market-like returns with less volatility and additional upside optionality.

We will make it a 10% position for now. If we find opportunities with a better risk-reward profile going forward, we will sell parts of our Berkshire position and reallocate that cash. That said, we still have enough cash to be flexible when great opportunities arise.

For more on Berkshire Hathaway, you can listen to our podcast here.

More portfolio updates below 👇

Weekly Update: The Intrinsic Value Portfolio

Notes

• PayPal, one of our portfolio holdings, recently announced several new product initiatives and partnerships. Here’s a quick overview of the highlights:

  • PayPal shares got a small boost on Thursday after Google (another one of our portfolio holdings) announced a multi-year partnership with PayPal on Agentic Commerce. The deal will see PayPal leverage Google’s AI technology to power new AI-driven shopping experiences.

  • Meanwhile, PayPal will be integrated across Google’s ecosystem, including Google Cloud, Google Ads, and Google Play, as a payment provider. And it’s not just Braintree (PayPal’s B2B solution) this time, but also PayPal’s Branded Checkout button and Hyperwallet.

  • PayPal has also rolled out off-site ads in the UK and Germany, two of its biggest markets. Another step into building a high-margin ads business. Again, with Mark Grether at the helm of PayPal ads, I’m optimistic about its prospects.

  • PayPal is also leaning further into crypto. Soon, users will be able to hold and send crypto peer-to-peer — including PYUSD, PayPal’s stablecoin, which has already seen volumes grow 40% year over year.

Quote of the Day

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

— Warren Buffett

What Else We’re Into

📺 WATCH: Interview with PayPal CEO Alex Chriss on Agentic Commerce, Stablecoins, and AI (one of our Intrinsic Value Portfolio holdings)

🎧 LISTEN: How McDonald’s became the global burger giant w/ Kyle Grieve

📖 READ: Semper Augustus Client Letters containing Berkshire Deep Dives

You can also read our archive of past Intrinsic Value breakdowns, in case you’ve missed any, here — we’ve covered companies ranging from Alphabet to Airbnb, AutoZone, Nintendo, John Deere, Coupang, and more!

See you next time!

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