Decoding Berkshires stock gods way: despise money and value reputation

 Decoding Berkshires stock gods way: despise money and value reputation

A survey of the rise and fall of great powers is accompanied by the change of financial hegemony. Rothschild, Goldman Sachs, Berkshire, Merrill Lynch, UBS The rise and fall of every financial group is the rise and fall of a great power. We look at the change of great powers through financial groups, and sort out the financial forces and operation modes behind the rise of each generation of great powers in detail, so as to provide fresh cases for the rising China and its financial institutions.

Today, with the rise of China, the door of financial opening is opening wider and wider, bringing unprecedented opportunities and challenges. The great rejuvenation of the Chinese nation will cultivate a number of Chinese financial institutions to step onto the world stage, and grow into the worlds top financial groups to help realize the great rejuvenation of the Chinese nation.

Extraordinary work, must treat extraordinary people! Lets see who is in charge of the ups and downs today!


Buffett has been in charge of Berkshire for 54 years. How to become the worlds top investment group? Some people attribute it to the National Games of the United States; some believe that it is the insurance + investment model to win; others worship its stock like investment ability. This paper attempts to fully reveal Buffett and Berkshires legendary investment experience and operation methods, looking for the successful enlightenment of great investors.

Buffett took the helm of Berkshire in 1965 and transformed the dying textile factory into an insurance group. He invested in the secondary market stocks from 1965 to 1999. Since 1999, he has taken part in controlling a large number of real enterprises. He has experienced several economic crises and stock market crashes, but has never made an annual loss. He has continued to outperform the S & P 500 index and other indexes. With the help of a few people, he has achieved great success by snowballing Wealth accumulation. At present, Berkshires total assets have reached 700 billion US dollars. Its subsidiaries involve insurance, railway, energy, manufacturing, retail and many other industries. In 2018, Berkshire ranked 12th among the worlds top 500 companies and became the worlds top investment group.

There are two reasons for Berkshires rise:

First, on the liability side, insurance provides sufficient and low-cost leverage funds. Berkshires insurance business mainly involves automobile insurance and reinsurance, with a float of up to US $122.7 billion. The reasons for its successful insurance operation are as follows: 1) expanding its scale through M & A and specialized in large-scale reinsurance, successively acquiring GaiKe insurance and general reinsurance, rapidly reaching the top 20 in the world, and underwriting large-scale insurance policies that other reinsurance companies are unwilling to sign with strong financial strength, rising to the top One of the three largest reinsurance companies in the world; 2) strictly control the cost of liabilities. Berkshires float cost in the past 41 years is - 2.1%, which means that it has not only no cost, but also obtained subsidies. The reason is that Berkshire focuses on property and accident insurance, does not play price war, and implements the extreme cost strategy; 3) uses conservative financial leverage and sufficient cash reserves to prevent risks. Berkshires leverage ratio of 2.06 is far away. It is lower than 3.07 of the U.S. property and insurance industry and 14.6 of the life insurance industry; cash assets are up to US $112 billion, accounting for 33% of the portfolio, fully prepared for liquidity demand.

Behind Berkshires success, it is indispensable to take advantage of national fortune, successful business model, outstanding personal ability and character. 1) national transportation. National economic development and capital market environment are the source of enterprise development. Berkshire takes the fast train of American economic prosperity and long bull stock market to enjoy the growth dividend brought by national transportation; 2) business model. Insurance + investment has great advantages, but it is not easy to grasp. Peace, Fosun, even Anbang are all followers of this model, and the fate is different. Berkshires insurance sector did not expand blindly, emphasizing the absorption of insurance funds at low cost or even negative cost, and strictly preventing repayment and liquidity risks. 3) investment capacity. In the final analysis, the ability and insight of entrepreneurs and investors determine the fate of the enterprise. Buffett, a generation of investment masters, takes the intrinsic value of the enterprise as the core of his investment logic, keeps away from the junk assets and is not interested in industrial integration. His persistence in value investment and his love for reputation have set Berkshire on the right path.

Risk tip: highly dependent on the capacity of investors, there is a succession risk. This report does not represent an investment proposal.


1 overview of Berkshire

1.1 development process: from textile mills on the verge of bankruptcy to investment machines

1.2 current situation: giant investment group, the third largest net profit in the world

2 manipulation analysis

2.1 liabilities: insurance provides sufficient and low-cost leverage

2.1.1 scale expansion: acquisition of property insurance and reinsurance, construction of 100 billion USD liabilities with insurance float

2.1.2 cost reduction: the cost of float is negative, and there is no price war

2.1.3 stable leverage: sufficient capital reserve and conservative financial leverage

2.2 good assets: prefer traditional industries and attach importance to moat and management

2.2.1 industry choice: prefer traditional industries, but in recent years, interest in technology enterprises has increased

2.2.2 company standard: advocate the concept of moat and attach importance to the management

2.2.3 investment mode: from stock investment transformation to equity merger and acquisition

2.3 good price: intrinsic value and safety margin

2.3.1 purchase price: Mining relatively undervalued stocks

2.3.2 transaction method: purchase preferred stock > common stock, pay cash > additional equity

2.3.3 investment strategy: hold for a long time, pay attention to reputation, reduce transaction cost and difficulty of M & A

3. Inspiration: can Berkshire appear in China

3.1 potential: Berkshires success is the product of American downwind

3.2 is the insurance + investment mode sure to succeed

3.3 skill: Investor spirit, despise money, value reputation


1 overview of Berkshire

Berkshire Hathaway used to be a textile factory on the verge of bankruptcy. It was taken over by Buffett in 1965 and opened the road of stock investment and value growth. Now it has become the 12th world-class insurance investment group among the worlds top 500 companies. Its share price has risen from 19 dollars per share in 1964 to 300000 dollars in 2019, becoming the most expensive stock in history. Its annual compound growth rate is 19%, far surpassing the standard The annual growth rate of 9.8% of the indexes, such as the Pu 500 index, has achieved a record of 54 consecutive years of profit from no loss, and achieved a huge wealth accumulation by snowballing.

1.1 development process: from textile mills on the verge of bankruptcy to investment machines

Initial construction period (1965-1969): initial construction of investment platform. Berkshire Hathaway (hereinafter referred to as Berkshire) was a textile company. After World War II, it was on the verge of bankruptcy due to the impact of cheap imported textiles. In his early years, bafitt followed Graham, believed in the cigarette butts Investment Law, constantly bought Berkshire at a low price, and took over the management in 1965. But every day in the textile business, three years later, Buffett joined the insurance industry, using Berkshires surplus funds to buy national insurance company (Nico) and national fire and maritime insurance company, officially opening the insurance investment base. During this period, Berkshires net worth nearly doubled, with an annualized growth of 18.4%, while its share price rapidly increased from $19 in 1964 to $66.

Growth period (1969-1999): Feili insurance, value investment. In the 1970s, influenced by Fisher and Munger, Buffetts investment philosophy evolved from buying ordinary companies at a low price to buying great companies at a reasonable price. As a result, Buffetts partnership was dissolved and all his energy was put into Berkshires operation. On the one hand, Berkshire was built into an insurance platform. First, Buffett began to buy GEICO shares in the secondary market in 1976, and Berkshire finally completed the acquisition of GEICO in 1996. Second, in 1998, Berkshire acquired general reinsurance company with a large sum of $22 billion, becoming a giant in the field of reinsurance. As of 1999, Berkshires premium income was $14.3 billion, accounting for 59% of the total revenue, and it successfully transformed into an insurance group. On the other hand, we use the abundant cash flow of insurance to practice value investment. The classic stock investment includes Washington Post, metropolis, Coca Cola, Wells Fargo Bank, Gillette, etc. the acquisition cases include high-quality enterprises such as hiSoft candy, Buffalo News, Nebraska furniture store, and Liege aviation. In the 30 years from 1969 to 1998, Berkshires net assets per share increased 987 times, with an annual growth of 26%, far exceeding 8.2% of the general 500. By the end of 1998, Berkshires total assets had reached US $122.2 billion, and its share price had increased from US $66 in 1969 to US $70000 per share. Buffett became a household name of God of stocks.

Mature period (from 1999 to now): steady operation, M & A is the king. At the end of the 20th century, Berkshires asset scale exceeded 130 billion US dollars. Such a huge volume cant rely on stock investment to make sustainable profits. Therefore, it turned to enterprise merger and acquisition. It successively launched three major merger and acquisition cases, including Burlington Northern Santa Fe Railway, Heinz company and precision machine parts company, with a cost of 94 billion US dollars, reaching multiple industries such as heavy industry, energy and consumption. In 2008, the global financial crisis, Berkshire decided to inject 5 billion dollars into Goldman Sachs to consolidate the foundation of the investment empire. From 1999 to 2018, Berkshires total assets increased from US $122.2 billion to US $700 billion, with an annual growth of 9.2%. Its net assets increased from US $57.4 billion to US $348.7 billion, with an annual growth of 9.4%. Its share price soared from US $70000 / share to us $300000 / share.

1.2 current situation: giant investment group, the third largest net profit in the world

Berkshire has transformed into an industrial investment group. Berkshires business is divided into five parts: insurance underwriting, securities investment, railway energy, manufacturing and service retail. 1) the insurance underwriting business covers automobile insurance, reinsurance and other varieties. 2) the securities investment sector is a portfolio of stocks and bonds measured by financial assets, such as Coca Cola and Wells Fargo, which Buffett has long been optimistic about. It should be noted that both insurance underwriting and securities investment are operated by insurance companies, which cannot be counted separately when measuring assets, liabilities and profits. 3) the main operation body of the railway is Burlington Northern Santa Fe Railway (BNSF); 4) energy and public utilities are composed of a series of energy and power enterprises; 5) manufacturing industry covers industrial products, real estate, consumer goods production, etc.; 6) service retail includes food, furniture, jewelry, automobile distribution, aircraft transportation and other businesses. Railway, energy, manufacturing, service retail and other diversified industries are all carried out by subsidiaries acquired by Berkshire, with a controlling interest of more than 80%. It is not a simple stock investment, but a deep involvement in industrial operation. As of 2018, Berkshire directly or indirectly controlled more than 500 companies with 390000 employees.

The insurance sector contributes to the scale and the industrial investment contributes to the profits. From the perspective of segment business, the proportion of asset-side insurance is only half. The total assets of insurance, manufacturing, railway, energy and public utilities, service and retail accounted for 47%, 20%, 13%, 14% and 6% respectively. The source of funds is mainly retained earnings and floating deposits. Retained earnings account for 45%, which is the largest source of funds. Insurance float, interest bearing liabilities and income tax liabilities account for 17%, 14% and 7% respectively. Diversified sources of income and profit. In terms of revenue contribution, service retail, manufacturing and insurance respectively contributed 32%, 25% and 25%, in terms of profit contribution, manufacturing, insurance and railway contributed 30%, 26% and 22% respectively, and the revenue and profit structure maintained a diversified and balanced state. In terms of return on assets, in the past three years, the ROA of railway, manufacturing and service retail sectors has been relatively high, with an average return of more than 5%, while that of insurance and energy utilities is relatively low, with an average return of 2% - 3%.

Berkshire has become a diversified industrial group and financial investment group. The model can be summarized as: using hundreds of billions of dollars of low-cost insurance float to invest in companies with moats at a reasonable price to achieve snowball growth of wealth.

2.1 liabilities: insurance provides sufficient and low-cost leverage

The insurance sector is Berkshires ammunition depot for the purpose of obtaining float. The significance of the insurance sector far exceeds its contribution in terms of revenue and profit. The mode of collect first and pay later enables insurance companies to collect premium in advance and operate in a unified way, and then pay it to the policyholders when they are in danger in the future. This mode allows insurance companies to hold a large amount of funds, i.e. floating deposit. Although the insurance companies do not have the ownership of floating deposit, they have the right to use it and can leverage the investment Leverage of M & A. It is precisely because of the commercial characteristics of insurance companies that insurance has become the cornerstone of the survival of other sectors.

2.1.1 scale expansion: acquisition of property insurance and reinsurance, construction of 100 billion USD liabilities with insurance float

Berkshires expansion of the floating capital mainly relies on the acquisition of insurance companies, specializing in large reinsurance business.

First, we will continue to purchase insurance companies and increase premium income. Buffett first acquired national insurance company (Nico) and national fire protection and marine insurance company in 1967, GaiKe insurance in 1996, general reinsurance in 1998, with a cumulative increase of 1472 times of premium income and a compound annual growth of 16%. By 2018, Berkshire ranked 12th in the global insurance industry with a premium income of US $57.4 billion, and 4th in the United States, which is the largest insurance company in the world One of the divisions. Through continuous acquisition and integration, there are currently three major insurance operators, namely GEICO, bhrg and bhprimary, respectively involved in automobile insurance, reinsurance and special insurance businesses, with a total of 27 insurance subsidiaries.

From the perspective of premium income of insurance companies, coverage insurance is the main contributor of premium income. In 2018, coverage, bhrg and bhprimarys insurance income accounted for 58%, 28% and 14% respectively. Reinsurance is the main contributor of float, and the float data of each company was only published in 2016. Bhrg, general Reinsurance (incorporated into bhrg in 2018), coverage and bhprimarys float accounted for 49% and 1% respectively 9%u300119%u300113%u3002 At this rate, the reinsurance business accounts for 68% of Berkshires float.

Second, it specializes in large-scale reinsurance business. With strong financial strength, Berkshire is one of the few insurance companies that can undertake catastrophe reinsurance business. The so-called reinsurance, which transfers risks for insurance companies, has a higher risk concentration, but it can also obtain a more substantial policy premium and premium income. The secret of Berkshire doing well in reinsurance business: 1) it has strong capital and the ability to sign some large insurance policies that are more than other reinsurance companies are unwilling to sign. Berkshire reinsurance is the third largest reinsurance company in the world, with a long-term 3A rating, which can undertake catastrophe reinsurance business. Under the impact of 9 / 11, other insurance companies were generally downgraded, unable or unwilling to develop new business. As the only 3A level company, general reinsurance dare to take orders and lay a leading position in the market. According to Buffetts 2015 letter to shareholders, there are only eight property and casualty insurance policies with a single premium of more than $1 billion in history, all signed by Berkshire. 2) be good at developing non-standard policies and improving bargaining power. Berkshire is good at pricing reinsurance policies one by one because of the huge amount of coverage, the complex process of responsibility identification and risk sharing. Berkshire, for example, has revealed that it is willing to underwrite $800 billion worth of bond default reinsurance to three insurance companies at risk of downgrade. To avoid the downgrade, they need to pay 1.5 times the amount of insurance to Berkshire reinsurance. In addition, its Nico insurance also develops many accident insurance and disability insurance with sports stars, for example, it underwrites the life insurance of boxer Tyson and creates a high premium policy. 3) lengthen reinsurance compensation time to ensure liquidity security. Although the concentration of reinsurance risk is greater, in serious accidents, loss assessment and settlement often take longer. Berkshire reinsurance claims sometimes span 50 years, so it will not impact the short-term cash flow.

However, in the past decade, the frequency and scale of major disasters have been increasing. Hurricane Katrina in 2005, hurricane Harvey and hurricane Alma in 2017 all hit Berkshire reinsurance business. The underwriting profit is meager, and the losses in 2017 and 2018 are as high as $3.7 billion and $1.1 billion. Buffett has expressed his pessimistic attitude towards reinsurance business.

The cost of Berkshires Insurance float in the past 30 years was - 2.1%. The floating deposit is equivalent to the money borrowed from the policyholder. The underwriting profit and loss determines the floating deposit cost, and the underwriting loss is the financing cost. In the 27 years from 1991 to now, Berkshire has achieved a total underwriting profit of US $13.3 billion, with a underwriting profit margin of 2.1%, which is equivalent to the average cost of Buffetts investment in float fund of - 2.1%. It has not only no cost, but also obtained subsidies from the policyholders. In the past 16 years, in addition to the loss in 2017, it has maintained the underwriting profit for 15 years.

The reason for Berkshire to maintain its extremely low debt cost is to choose the right track, the right strategy and the right model.

First, focus on the property accident insurance circuit to avoid the erosion of life insurance on the cost of liabilities. Among many insurance categories, bafiti Zhongai property insurance has the following reasons: 1) low cost of liabilities. Property insurance float is different from life insurance reserve. Life insurance reserve needs to promise yield. It is easy for insurance companies to promise high yield for short-term competition, resulting in high debt cost and damage. 2) the cash flow is more stable. Life insurance can be withdrawn, which means that reserves may be withdrawn at any time. In property insurance, automobile insurance will be paid once a year without large-scale withdrawal and run. As a result, the average underwriting profit margin of Berkshire insurance in 2013-2017 is higher than the overall level of the U.S. property insurance industry, and much higher than the life insurance industry.

Second, we should set clear business objectives and not expand market share with price war. At the beginning of Buffetts acquisition of general reinsurance company in 1998, because of the fierce competition, in order to compete for market share, he did not charge enough for insurance policies, endangering the companys lifeline. Later, Buffett set a clear goal for the insurance business, insisting that market share cannot be expanded at the cost of loss. Nico insurance company set the price at a level that can guarantee the profitability, even after experiencing a 14-year market share decline since 1986. Similarly, in 2006, the U.S. did not suffer from a major hurricane, the reinsurance market profits are good, companies in the hurricane policy price war, Buffett decided to reduce the risk in the hurricane.

Third, direct selling mode is used to control costs. Berkshires GaiKe insurance company is one of the largest auto insurance companies in the United States. Its competitive advantage lies in the ultimate cost control. The annual comprehensive cost rate of GaiKe insurance is maintained below 96%, and the capital cost is negative. 1) focus on low-risk and high-quality customers. The initial customers of Gekko insurance are government employees, with conservative behavior preference and low risk of driving a car. 2) build a strong direct sales channel. Gekko insurance is a direct selling insurance company. Customers mainly buy insurance by phone, Internet and mail. In 2010, Gekko insurance became the first insurance company supporting mobile insurance in the world, which saved a large number of agents and expenses of traditional insurance, so the cost and pricing are lower. 3) improve the market share by virtue of low price and public praise. According to the driving background, education level and loyalty of the applicant, GaiKe insurance can offer discounts, or even pay in installments. At the same time, GaiKe insurance can put out the slogan of 15 minutes saved by 15%, which is highly efficient and favorable. GaiKes performance continued to grow, with its market share increasing from 4.7% in 2000 to 13% in 2018.

2.1.3 stable leverage: sufficient capital reserve and conservative financial leverage

First, optimize asset allocation, with a cash reserve of up to US $100 billion. Buffett pays attention to liquidity risk. In 2018, Berkshire held us $112 billion of US Treasury bonds and other cash equivalents. In the portfolio of insurance sector, the allocation proportion of cash, fixed income, loan and equity assets was 33%, 6%, 5% and 57%, respectively. During the same period, the U.S. property and life insurance industry allocated a large number of fixed income bonds, accounting for 70% and 56% respectively, while the cash allocation was less than 5%, while the stock allocation was 24% and 6% respectively. High liquidity assets lay the foundation for timely performance of insurance compensation liability, which is sufficient to meet liquidity demand at critical moment.

Second, control the leverage ratio. According to the standard of accounting principles, Berkshire insurance has a net worth of US $6 billion, ranking the second in the United States; Berkshire strictly controls financial leverage, with an average leverage ratio of 2.06 in 2016-2018, lower than the leverage ratio of 3.07 in U.S. property insurance and 14.6 in life insurance in the same period.

Third, diversified profit sources and complementary business. Berkshires diversified operations in the manufacturing, service and utility sectors generate stable net profit and cash flow to support the development of the insurance business. Buffett once said that no company is as financially prepared for a $250 billion catastrophe as Berkshire Hathaway is.. In such a disaster, our losses may be between $7.5 billion and $12.5 billion, far less than the estimated annual profit from our non insurance activities. In 2018, non insurance business contributed 74% of profits.

2.2.1 industry choice: prefer traditional industries, but in recent years, interest in technology enterprises has increased

In terms of industry choice, Berkshires industry preference has gradually shifted from traditional industries such as finance, consumption and media to finance, technology and public utilities.

Financial stocks have always been Berkshires most important position. The financial industry has been able to maintain the stability of the competition pattern for a long time due to licensing, supervision and other factors. The market value of financial stocks increased steadily from 31% in 1980 to 46% in 2018. In addition to acquiring insurance, Berkshire also acquired the National Bank of Illinois and Rockford trust company in the early stage, covering multiple financial licenses. At present, its stock portfolio includes Bank of America, Wells Fargo, American Express, JPMorgan Chase, Goldman Sachs, Moodys, etc., ranking among the top 15 heavyweight stocks of Berkshire in 2018.

The demand of consumer industry is stable, the business is simple, and it is favored. Consumer demand for daily consumption has been stable for a long time. Once consumer goods become peoples preferred brand, it will form customer stickiness and occupy the dominant position in competition. But consumer goods are very different. Buffett has a unique vision for the moat of different industries. For example, he views the difference between food industry and beverage industry, people are more changeable in choosing to eat, they may like McDonalds, but they will go to different restaurants at different times, and there will never be a second Coca Cola in the soft drink industry.. Coca Cola like companies, as well as Gillette razors, kraft Heinz and other fast repeat consumer goods, even if he invests in apple, he also values the electronic consumption attribute. Although the market value of consumer stocks declined slowly from 17% in 1980 to 11% in 2018, Buffett still loves the consumer industry most.

The paper media industry fell into decline and its position declined sharply. Buffett believes that paper media is monopolistic and has had famous investment cases such as Buffalo evening news and Washington Post. In 1977, Buffett bought buffalo evening news for $32.5 million, but due to fierce competition and labor union resistance, the total loss before tax in five years was as high as $12 million, but Buffett still insisted on widening the moat and improving the market share. In 1982, the final competitor closed down, and later became Buffetts toll bridge, with a profit of $40 million. However, with the popularity of TV and Internet, Buffett acknowledged that the fundamentals of the newspaper industry have deteriorated significantly, and the proportion of market value of media stocks fell sharply from 19% in 1980 to 1% in 2018.

Public utility capital monopoly became the focus of Berkshires M & A investment after 2000. BNSF rail and Berkshire Hathaway energy, which are utilities, currently account for 25% of their total assets, more than the total market value of all stock positions. Buffett is optimistic about public utilities and invests heavily. Even if he needs a lot of long-term debt support, he doesnt need Berkshires credit guarantee. His profitability is stable for a long time.

Buffett gradually tried to accept the technology industry. Although the growth prospect of science and technology industry is great, the competition pattern is often subverted by the emergence of new technology, and the prediction difficulty is beyond Buffetts ability range, so it has been excluded from the investment scope for a long time. But after 2011, Buffett invested heavily in IBM and apple, indicating that the investment philosophy is still evolving, but IBMs investment results are relatively unsuccessful. At present, the position of science and technology industry accounts for 26%.

2.2.2 company standard: advocate the concept of moat and attach importance to the management

Quantitatively, the moat can be divided into the following features: 1) large scale, 2) continuous profit, 3) high roe and less debt, 4) simple business. We select 53 stocks that Berkshire has invested and currently invests as the quantitative analysis sample, 42 of which are held until the second quarter of 2019, and 11 stocks that Buffett once held and highlighted, including the famous investment cases in Buffetts history. In the industry, the number of Companies in finance, optional consumption and daily consumption industries ranks the top three, and the value of stock market in finance, information technology and daily consumption industries ranks the top three.

Large enterprises are preferred in scale. 1) enterprises with total assets preference of more than 50 billion. Four companies have total assets of more than $1 trillion, 29 of which are between $50 billion and $1 trillion, accounting for 66% of the total. The five companies with the largest total assets are JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs and United Bank of America, all of which are financial enterprises with a total position of 63.7 billion US dollars, accounting for 30% of their positions. 2) business income preference is more than 10 billion. Eight companies have a total revenue of more than $100 billion, 31 of which are between $10 billion and $100 billion, accounting for 78% of the total; the five companies with the highest total revenue are apple, Amazon, general motors, Costco and Philips 66, mainly consumer and technology companies, with Berkshire holding a total of $54.9 billion, accounting for 26% of its position. 3) 15 companies with market value exceeding 100 billion US dollars. Berkshire owns 7 companies with a market value of more than $300 billion, and 8 companies with a market value of $100-300 billion. The top five companies with the highest market value are apple, Amazon, JPMorgan, Johnson & Johnson and visa. Berkshire has a total position of $594, accounting for 28% of its position. 4) it has 11 Fortune 500 companies. 11 subsidiaries of Berkshire have access to Fortune 500, including precision parts company, kraft Heinz, Burlington Northern Santa Fe Railway, Berkshire Hathaway energy company, IMC (Israel metal processing tool supplier), Lubrizol and Marmon.

Pay attention to high roe in profit. The vast majority of enterprises achieved positive net profit. In 2018, there were 8 companies with net profit of more than 10 billion US dollars, 13 companies with net profit of 5-10 billion US dollars, accounting for 42% in total. Only two companies have negative net profit. The top five companies with the highest net profit are apple, JPMorgan Chase, Bank of America, Wells Fargo and Johnson & Johnson, accounting for 49% of Berkshires positions. The distribution of net profit margin is relatively scattered. In 2018, there are 9 companies with a net profit margin of more than 30%, 19 companies with a net profit margin of 0-10%, accounting for 38%. Roe is concentrated in 10% - 20%. In 2018, 15 roe companies accounted for 10-20%, accounting for 30%. The top five roe companies are Moodys, UPS express, MasterCard, American Airlines and apple. Berkshire has a total position of $57.6 billion, accounting for 27% of its position.

In terms of robustness, maintain healthy debt level and operating cash flow. In terms of asset liability ratio, the companies with 50-80% are the most, with 23 companies accounting for 44%. The vast majority of enterprises realize the net inflow of operating cash. There is only one company with negative operating cash flow, 15 companies with 10-50 billion US dollars, accounting for 30%. The top five cash flow companies are apple, Bank of America, Wells Fargo, Amazon and Johnson & Johnson. Berkshire has a total position of 97.2 billion US dollars, accounting for 46% of its position.

In terms of management, Buffett requires that managers should be good enough to marry their daughters to him with confidence. There should be three specific qualities: responsible to shareholders, honest and independent thinking. To be responsible for shareholders mainly means that the management should allocate capital from the perspective of the owner, devote to improving the value of shareholders, and the project investment should exceed the average rate of return, otherwise it should pay dividends or buy back shares; to be honest means that the management should fully and truly reflect the financial situation of the company, be open to shareholders, admit mistakes, and respond to shareholders concerns honestly; to think independently means management Layer should avoid inertia or blindly follow, dare to make unconventional decisions. Buffetts strong ability to identify people and select people has become a key factor in a large number of investment cases, such as the acquisition of Boxian jewelry. Buffett did not check the accounts and accounting of assets, and only signed the acquisition agreement with the simple instructions of the management.

Once Buffett is optimistic about the investment target, he usually adopts two ways: secondary market investment and merger and acquisition. In terms of capital flow, Berkshire has paid more attention to M & A in recent 20 years. From 1996 to 2018, its net cash expenditure for M & A totaled about 135 billion US dollars, three times the corresponding amount of shares in the same period. As a result, Berkshires dependence on unlisted subsidiaries has increased year by year, and its asset structure has changed from dominated by shares to both industry and shares.

But the investment method does not affect Buffetts investment standard. For Buffett, the criteria of stock investment and merger and acquisition are the same, because buying stock is to buy a company, and we need to analyze it like buying the whole company. In turn, the standard of M & A will not be lowered, nor will it be expected to improve operation through business collaboration or more capital investment. For Berkshire, wed rather be a shareholder in a great company than an absolute shareholder in a general company. In practice, in the face of the same enterprise, Berkshires choice of stock investment or merger and acquisition mainly depends on the price. When the price is right, Buffett prefers merger and acquisition. Many merger and acquisition starts from stock investment, such as GaiKe insurance, Burlington North Santa Fe Railway, Heinz, etc.

The principle of safety margin mainly refers to that the purchase price should be lower than the calculated intrinsic value and keep a certain distance as far as possible to ensure the relative safety of investment. It must be a bad investment to pay too much for a company in good economic condition.

2.3.1 purchase price: Mining relatively undervalued stocks

Buffett said in 1998, the best thing for us is that a great company is in a temporary predicament. We want to buy when theyre lying on the operating table. Good at combining two methods to find undervalued stocks: one is absolute valuation method. Buffett has a way to calculate the intrinsic value, that is, the discounted value of the cash that an enterprise can generate in the rest of its life. Buffett bought Coca Cola shares for the first time in 1988, and the share price is considered to be at an all-time high, equivalent to spending five times the book value to buy $1.3 billion. But Buffett firmly believes that the intrinsic value of Coca Cola is undervalued. After 30 years, the market value of Coca Cola has risen from 15 billion to 200 billion dollars. Second, relative valuation method. We have sorted out 44 investment targets that Buffett often mentioned. The average p / E ratio at the time of purchase is 14 times, and the P / E ratio of 68% stocks is less than 15 times.

2.3.2? Transaction method: purchase preferred stock > common stock, pay cash > additional equity

First, in terms of purchase form, preferred stock is more conservative than common stock. Preferred stock, especially convertible preferred stock, can guarantee the safety of investment by means of fixed dividend, and at the same time, it will not miss the excess return brought by the future stock price rise, so it can be attacked and retreated. In 2008, Buffett purchased $14.5 billion of perpetual preferred shares issued by Wrigley gum, Goldman Sachs and general electric, with an annual dividend rate of 10%. With a large number of warrants, he can get common shares at a low price and get a huge return. However, Berkshire invested in Salomon and American Airlines in the form of preferred shares, and then suffered a sharp decline in the stock price. The preferred shares effectively controlled the risk, and finally left.

Second, on payment instruments, cash > additional equity issuance to avoid dilution of equity. Berkshires long-term value-added potential is huge. In the past 20 years, the value-added of Berkshire stock is 5 times, so the opportunity cost of additional equity is greater than that of cash purchase. Historically, Berkshire mainly carried out M & A in the form of cash, and the number and scale of additional equity are less. Buffett issued 270000 shares of Berkshire in 1988 when he bought general reinsurance, which increased the number of outstanding shares by 21.8%. He admitted that it was a bad investment and paid too much for the company.

2.3.3? Investment strategy: long-term holding, focusing on reputation, reducing transaction cost and M & a difficulty

1) in stock investment, long-term strategies should be implemented to reduce transaction costs. First, never pay dividends and avoid double taxation. Dividends will face a second tax, so Berkshire never pays dividends. In the United States, 35% of the corporate income tax has been implemented for a long time, and the income tax levied on one dollar of profits has been changed to 65 cents, leaving only 45-55 cents after all of them are sent as dividends. Second, never sell and avoid capital gains tax. As long as the securities are not sold for realization, the capital gains tax can be postponed indefinitely. Therefore, Berkshire is oriented by long-term holding. It has held the Washington Post for more than 40 years, Coca Cola, American Express and Wells Fargo Bank for more than 20 years. Although the stock price of Coca Cola has not risen in more than ten years since 1998, Buffett still hasnt sold it.

2) in terms of M & A investment, we should pay attention to reputation and build a forever harbor for enterprises. In the 1980s, junk debt and hostile takeover prevailed in the capital market of the United States. Berkshire pays attention to reputation, does not participate in malicious acquisition, and is labeled as the preferred harbor that can be permanently docked. The founders sell the company to Berkshire, the daily management of the management is not interfered, the original personnel and culture will be preserved, and its financial advantages and growth potential will be greatly enhanced. This makes many founders and families who want to sell the company tend to sell the company to Berkshire. For example, in 1995, Berkshire successfully acquired Willie furniture even though the offer was lower than the competitors $25 million.

Under Buffetts leadership, Berkshire has become the worlds top investment group from the dying textile mill. It is indispensable to take advantage of the smooth ride of Sinotrans, successful business model, outstanding personal ability and character. Buffetts fans and imitators are endless, but so far no one has been able to shake Berkshires position in the investment community.

Many entrepreneurs in China try to build financial investment groups based on insurance. For example, Ping An, starting from insurance, has become one of the worlds top insurance companies step by step; Fosun, starting from investment, has grafted on the insurance model to build a cross-border investment platform; there are also insurance black horses, such as Anbang, who rely on universal insurance to absorb high-cost insurance liabilities, invest in stocks, real estate and other fields, and end up in prison due to risk exposure and illegal behaviors. Why is the fate of the same pattern so far apart?

3.1 potential: Berkshires success is the product of American downwind

After the Second World War, the prosperity of American economy brought the full development space to Berkshire. Buffett is firmly optimistic about the development prospect of the United States. He dares to take action under the pessimistic and fearful situation of others, grow together with high-quality enterprises, and enjoy the economic development of the United States. He has repeatedly described the role of the National Games of the United States, betting on the economic prospects of the United States with all his wealth and Berkshires success, to a large extent, is only a ride on the American economy.. On the one hand, the dividend of American economic development. After World War II, the United States dominated the world hegemony. In 1980, Reagans supply side reform ushered in a 20-year economic boom in the United States. The huge economic volume provided Berkshire with a wide range of M & A and investment options. Thanks to the long-term prosperity and consumption growth of the U.S. economy, more than 500 subsidiaries of Berkshire make a profit of 10 billion US dollars every year, which is an important factor for the steady return on M & A. The second is the long bull market in the United States. From 1980 to 2000, the U.S. capital market ushered in a long bull. With the launch of 401k plan, large institutions such as mutual funds and pension funds came into the market, and Berkshire, a heavy investor, grew rapidly. Third, a good capital market environment. The mature capital market provides a favorable market ecology for Berkshire. In the long-term evolution of the American capital market, the mainstream of value investment has been formed, and the long-term survival of the fittest has restrained the speculation.

Chinas economic volume is 65% of that of the United States, but the capital market volume is only 21% of that of the United States. The market environment needs to be improved. Since Chinas reform and opening up, economic development has made remarkable achievements. In 2018, the U.S. GDP reached 20.5 trillion US dollars, with a growth rate of 2.9%. Chinas total GDP reached 13.6 trillion US dollars, with a growth rate of 6.8%. Chinas economy is 65% of that of the United States, ranking the second largest in the world. But the size of Chinas capital market is far from enough to match the size of the economy. In 2018, the total market value of U.S. listed companies was 30 trillion, accounting for 149% of GDP. The total market value of Chinese listed companies was 6.3 trillion, accounting for 46% of GDP. The volume of Chinas capital market was only one fifth of that of the United States. Chinas capital market environment needs to be improved. The developed capital market can form a sound ecosystem of value investment, high-quality companies get their due valuation, value investors get their due returns, and form a healthy long bull development pattern. However, there are still many deficiencies in the laws and regulations, supervision methods and market ecology of Chinas capital market. The market is volatile, the atmosphere of speculation is heavy, all kinds of financial chaos are clustered, and the good ecology of value investment is still a long way to go.

The business model is Tao. Many people are not optimistic about the diversification and expansion of enterprises, and think it is inefficient and difficult to integrate. But why is Berkshires integrated business model successful? Buffett mentioned that if you can use the integrated business model wisely, it will be an ideal model for capital to increase value in the long run and maximize..

When Berkshire established the insurance Empire and obtained the floating capital, it did not expand blindly, emphasized the low-cost or even negative cost to absorb the insurance capital, and strictly prevented the risk of repayment and liquidity; its investment logic took the internal value of the enterprise as the core, avoided the garbage assets, and was not interested in the industrial integration. Berkshire focuses on the brand, product characteristics, business model, business history, debt situation, management and price of the enterprise during the M & A, so as to ensure that the enterprise can achieve a stable return on equity under the current situation, and is not keen on asset integration and transformation. Therefore, although there is no integration and connection between the subsidiaries of Berkshire, most of them can continue the business The steady performance and large profits make Berkshire a large diversified industrial group.

3.3 skill: Investor spirit, despise money, value reputation

As a generation of value investment masters, Buffett looks down on money, values reputation, sticks to value investment and cherishes reputation, which leads Berkshire on the right path.

Buffett. Buffett was born in 1930 to a wealthy family in Central America. His father was a stockbroker and a former congressman. After graduating from college, Buffett was convinced by Graham after reading smart investors, and then went to Columbia University to become Grahams student. As the father of modern securities analysis, Graham put forward the concept of intrinsic value and the principle of safety margin, which is well known in the investment field. Buffett not only fully studied Grahams securities analysis theory, but also worked with Graham in stock investment. At the age of 25, Buffett established a partnership, and then emerged in the investment world with his amazing performance. In 1968, when the stock market sang all the way but Buffett found that there was no cheap asset, he liquidated Buffetts partnership. After that, Berkshire began another legendary investment experience.

How does Buffett view the stock market chaos. In fact, in the late 1960s, American companies were also keen on the routine of frequent M & A, speculation of concepts, and re encircling money. Buffett scoffed, we never invest in companies that are keen on issuing new shares, which usually represents a sales driven management, unhealthy accounting, overvalued stock prices and dishonest corporate culture.

The widely recognized reputation is also the reason why Berkshires M & A is more successful. It propagandizes and implements the corporate culture of giving M & A enterprises a permanent home and never makes hostile acquisitions. It is unique in the boom of junk bonds and leveraged buyouts in the 1980s and has won the general recognition and respect of the American commercial and financial circles. This long-term reputation has reduced Berkshires resistance in a large number of M & A and reduced the M & a price under certain circumstances.

Source: Zeping macro Author: Ren Zeping editor in charge: Wang Xiaowu Gu NF