In The Massive, Hidden Problem at Berkshire Hathaway (BRK), the author opens with acknowledging his view that Warren Buffet’s Berkshire Hathaway is being mismanaged is controversial. The article splits BRK’s history into 3 parts:
First, the company started to amass cash through insurance companies with significant amounts of “Float”, or cash being held from premiums.
With the Float cash, BRK started making smart minority stake investment on great businesses with no need for additional capital and low management energy, therefore compounding it’s earnings. Subsequently, the strategy shifted to fully acquiring companies with similar traits: low capital and management energy need.
A tipping point starts when BRK starts to acquire companies with big need for capital, downgrading the overall portfolio, owns big companies, and invests in highly regulated portfolios.
The shift in strategy breaks the compounding dynamic, relies heavily on earnings, and consumes vast amounts of capital. The last mistake is increasingly injecting capital to highly regulated companies that have no possibility of returning on investment.
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