Buffett Loves The Insurance Operations that deliver "float" or costless capital of $70 BILLION .

• Our insurance operations continued their delivery of costless capital that funds a myriad of other opportunities.

• This business produces “float” – money that doesn’t belong to us, but that we get to invest for Berkshire’s benefit. 
• And if we pay out less in losses and expenses than we receive in premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing. 
• Though we are sure to have underwriting losses from time to time, we’ve now had nine consecutive years of underwriting profits, totaling about $17 billion. 
• Over the same nine years our float increased from $41 billion to its current record of $70 billion. Insurance has been good to us

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Growth Investing Examples from Berkshire Hathaway

-  On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain.

Comment:  Lubrizol grew its pre-tax profits from $147 million from 2004 to $1,085 million.   Thus its pre-tax profit has grown at the compound annual growth rate of 33.05% over 7 years.

• Buffett likes this company for its good earnings growth.  
• The good earnings growth rate also is reflective of the good business fundamentals of this company.
• Buffett loves buying / owning wonderful company (that are growing).

-  Our major businesses did well last year. In fact, each of our five largest non-insurance companies – BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011. Contrast that to seven years ago, when we owned only one of the five, MidAmerican, whose pre-tax earnings were $393 million. Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion.

Comment:  

1994:  Mid American contributed pre-tax earnings of $393 million.

2011:  BSNF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy earned $9 billion pre-tax.

• BSNF and Lubrizol are recent acquisitions of Buffett.  
• Buffett likes these companies for their earnings and growth.  
• Buffett even projected that their aggregate earnings will top $10 billion next year, 2012 (a growth rate of 11%).

-   In total, our entire string of operating companies spent $8.2 billion for property, plant and equipment in 2011, smashing our previous record by more than $2 billion. About 95% of these outlays were made in the U.S., a fact that may surprise those who believe our country lacks investment opportunities. We welcome projects abroad, but expect the overwhelming majority of Berkshire’s future capital commitments to be in America. In 2012, these expenditures will again set a record.

Comment:  

Yes, to grow one has to re-invest.  Looks like Buffett reinvest all the free cash flows ($8.2 billion capital expenditure) for future growth.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

A Tour of Berkshire Hathaway World Headquarters

Warren Buffett gives a tour of Berkshire Hathaway’s World Headquarters in Omaha, Nebraska:

BERKSHIRE HATHAWAY AND RETAINED EARNINGS

BERKSHIRE HATHAWAY AND RETAINED EARNINGS

Berkshire Hathaway does not, following Buffett’s mantra, pay dividends to its shareholders and this is one reason why its compound return over the years of Buffett-Munger management has been so high.

• The downside of course is that shareholders have not received dividends, meaning, that if they were dependent on money coming in at a given time, their only recourse, in relation to their shareholding, would be to sell the shares or borrow against them.
• Having regard to the huge price of a single share over the past few years, this meant that investors may have had to either keep all their shareholding or dispose of it, not always the choice they wanted. Berkshire Hathaway partly catered for this dilemma by introducing B shares, which are in essence a fractional unit of the normal shares.

A POWERFUL FORCE

When asked to nominate the most powerful force on earth, Albert Einstein is reputed to have answered ‘compound interest’. Buffett might well agree.