Are you Berk- shi – fied?
Tanvi Mehta, Ramswamy Ranganathan and Sudarshan Rajan are Value Investors teaching the craft of valuation in leading Business Schools. In this authored piece they write about protecting yourself from the stock market plunge by sharing an analysis of Berkshire Hathaway's value investing practices.
Dial back a little over a decade and move into 2008/2009 and the horrors of the stock market memory seems fresh today with the current pandemic enveloping the world. Now dial back close to little under 2 decades and think if you remember the tech boom crash in the stock market. We can keep dialing back to Asian financial crisis, then 1980s crash and keep moving back up to the great depression.
As time passes all tragic stock market events seems less meaningful even though the brutal nature of capitalism will keep playing its role in future too. For Business its pertinent to weather this storm and also ask pertinent questions.
We ask you a question “ARE YOU BERK- SHI- FIED” if you haven’t asked yourself this, its high time you ask yourself this.
What does that mean, it simply means does your balance sheet has cash more than $100 Billion. This cash on balance sheet is a durable competitive advantage which seems highly magnified in today’s crisis. Companies having disproportionate cash, today are in a highly advantageous position as companies saddled with high debt in their balance sheet.
In the global world only 4 companies match this criteria Alphabet, Apple, Berkshire, & Microsoft. The outcome is a cash balance, which is not achieved by accident by any of these businesses, but it is a function of competitive moat, with brilliance of management skill.
Berkshire will forever remain a financial fortress (2018 Letter)
Why does Berkshire Hathaway become extremely valuable in times like these?
Capital Allocation. The huge cash pile is a brilliant advantage to the maxim of existing shareholders coupled with the brilliance of capital allocation skills of Warren Buffett and Charlie Munger. Warren was always looking for an elephant sized acquisitions, but prices were too high for comfort and in times like these its where you find value. Warren and Munger are master allocators of capital, their last giant-sized acquisitions was Precision Parts in 2015. Warren also has reputational advantage, which no on globally can match. Think 2008 how he invested in Bank of America, Goldman Sachs & General Electric to name a few all have turned out to be a hugely profitable for Berkshire.
Compounding Business. Berkshire is a misunderstood investment vehicle as Bill Ackman had laid down his thesis for investing in Berkshire. In reality Berkshire is a collection of high-quality business which consistently leaks cash into an already mammoth cash pile, which is invested by Warren and his 2 deputies to further generate value for its shareholders.
Genius of Float. Berkshire’s insurance business is not only one of the largest but also one of the most profitable. Its underwriting record is unmatched by rivals, the float has grown by the clear illustration given below
The float is recorded as a liability but in true economic sense, it’s a moat.
Buffett illustrates this value by calling float a revolving fund—each day Berkshire pays out millions of dollars of claims, which reduces float. But each day millions of dollars of new business are written, which adds to float. As long as policies are written profitably (premiums collectively offset claims and operating expenses), and as long as new premiums coming in replace claims going out, then float will be both interest-free and won’t have to be paid back. For Berkshire, the cost of float has been close to free due to outstanding underwriting.
Berkshire is a financial powerhouse and the coronavirus pandemic may accelerate before it dwindles, but one thing is for sure for companies with huge cash balances they are BERK- SHI – FIED. Every crisis, wherever it starts or whatever may be the cause all will eventually lead to a financial crisis. In these crises, a financial fortress will never run out of cash, asset game is the game to play, and truly exceptional business always have rich cash in their books.
These are times to think and overthink so think to BERK SHI FI your business so that eventually that is what would be the difference between a good business and exceptional business.