How to Build the Next Trillion Dollar Business

This article is an excerpt from the Shortform book guide to "Poor Charlie's Almanack" by Charles T. Munger. Shortform has the world's best summaries and analyses of books you should be reading.

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What is Berkshire Hathaway’s investment strategy? Can the company perpetually maintain its impressive rate of return on investments?

Berkshire Hathaway’s investment strategy involves using the cash collected from the conglomerate’s insurance subsidiaries and investing it in other businesses at a much higher rate of return. The strategy has helped the company to grow to be as large as it is today. However, even Charlie Munger notes that it will be difficult to maintain the company’s historical returns because it is harder to find underpriced investments when you have billions than when you have a few million.

Read on to discover more about Berkshire Hathaway’s investment strategy.

Berkshire Hathaway’s Strategy

Despite its giant size, Berkshire Hathaway’s investment strategy is relatively simple:

  1. Use insurance companies to generate “float,” or cash collected from insurance premiums before claims have to be paid.
  2. Use this float to invest in businesses at a much higher rate of return than has to be paid out.

In essence, if you can take in money at 3% and invest it in things that grow at 13%, and you can do this for 50 years, you can grow to be very large, as Berkshire Hathaway has.

Warren Buffett and Charlie Munger are famously hands-off in the management of companies they acquire. They decentralize all the decision-making to the owned companies, trusting that the company managers are in the best position to make technical decisions for their companies. In this way, they recognize their circle of competence—they’re good at spotting businesses to invest in, but they know they’re not the best to run them. (Shortform note: For a detailed look at Berkshire Hathaway’s management style and its investment model, read our guide to The Outsiders.)

Compared to other public companies, Berkshire Hathaway has the advantage of being very patient, long-term planners who don’t mind lumpy results in the short-term and don’t care about pleasing Wall Street. When the market is unfriendly, Berkshire is willing to underwrite less insurance and avoid doing deals. Then, when the market flips, Buffett and Munger can swoop in and take advantage of great deals.

However, Munger notes that the impressive historical returns created by Berkshire Hathaway’s investment strategy will be hard to match as it grows. It’s much harder to find underpriced, low-competition investments when you have $10 billion than when you have $10 million. 

Tenets of Berkshire Hathaway’s Investment Strategy

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  • A collection of Charlie Munger’s best advice given over 30 years
  • Why you need to know what you’re good at and what you’re bad at to make decisions
  • Descriptions of the 25 psychological biases that distort how you see the world

Joseph Adebisi

Joseph has had a lifelong obsession with reading and acquiring new knowledge. He reads and writes for a living, and reads some more when he is supposedly taking a break from work. The first literature he read as a kid were Shakespeare's plays. Not surprisingly, he barely understood any of it. His favorite fiction authors are Tom Clancy, Ted Bell, and John Grisham. His preferred non-fiction genres are history, philosophy, business & economics, and instructional guides.

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