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Berkshire largely outperforming S&P 500
May 5, 2017


Well, it's that time of the year again - when value investors make pilgrimage to Omaha, their Mecca, for the Berkshire Hathaway annual general meeting.

Tomorrow, 6 May 2017, Berkshire's 53rd AGM will be streamed live.

What will be the highlights this year?

Typically in AGMs, Berkshire's performance and future growth drivers remain the focal point.

Warren Buffett in his 2016 annual letter to shareholders has already shared his valuable insights on the Berkshire's business performance.

The document is yet again an enriching guide for value investors to replicate Berkshire's phenomenal performance.

And Berkshire has indeed earned superlative returns - 20% every year for the last 51 years compared to just 10% for the S&P 500.

The pillars of Berkshire's stupendous performance have been its long-standing investments in cash generating companies such as Coca Cola and See's Candy. But the biggest driver of its growth is the insurance business that it acquired in 1967.

Insurance companies receive premiums upfront for claims that may be filed in the future. Thus, they're are armed with large amounts of money termed as float as the money eventually must be paid back. But the advantage of the float money is that it can not only be used to service Berkshire's day-to-day business needs but can also be invested for higher returns. Moreover, as the insurance business grows, the interest-free float money grows along with it.

Berkshire's float has grown from US$39 million in 1970 to US$92 billion in 2016 and recently crossed US$100 billion.

In other words, companies that generate low-cost capital internally have an edge. These businesses don't depend on external funds for growth and are in a better position to ride out business cycles.

Therefore, Berkshire's superlative performance over the years can be traced to its investments in businesses that either throw up a lot of cash or have access to interest-free capital.

These are the type of companies high on the ValuePro team's shortlist. We've had great success with them in the past over the long term, which is reflected in ValuePro's market-beating performance since inception in 2009.

Going ahead, Berkshire Hathway's acquisition led growth strategy is limited by the deal size. Also, the company's sizeable stakes in the once hated airline business have also come in for a lot of flak.

The compulsion to bet on large sized companies may continue to hinder Berkshire's future growth. But no such compulsion for our subscribers who buy Buffett-would- buy kind of stocks recommended in ValuePro. In fact the team just recommended four nimble businesses with durable and sustainable moats. Click here (Subscription required) to know more.

Data Source:Berkshire Hathaway

This Chart Of The Day was published in The 5 Minute WrapUp - 20% Returns Every Year For 51 Years

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