As I understand it, Berkshire Hathaway works is as follows:
1. Warren Buffet buys companies that are profitable and well managed.
2. Excess profits from these companies are invested by Buffett and not their own internal investment groups.
3. Some companies, like Coke are pure investments.
Big companies often have significant liquid assets that they need to manage - money they are not ready to return to shareholders. This money needs to be managed so that it retains its value (the time value of money thing) and so big companies often have a money manager doing this job. This is where Buffett fits in - who better to manage your liquid assets!
This is why Buffett likes insurance companies - they are essentially companies that MUST invest their money carefully because it is the gamble they are making - that your invested premiums will more then cover the costs of claims. An insurance company (Geico, for example) benefits when its money is invested more carefully by being more competitive (i.e. lower rates).
There is a good synergy in this arrangement - Buffett is an exceptional investor and the companies he owns outright benefit from his savvy. He is like the anti-raider. I'm not aware of any company he has ever dismantled for its "hidden assets".
I have no affiliation with BH other then being a shareholder (I have not, however, been to Omaha - so I guess I'm not a true believer yet
).
Cheers,
Bob Welland
