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| Photo By: Aaron Friedman / Flickr |
In Warren Buffett's letter to the Berkshire Hathaway shareholders, he made a reference to the conglomerate's "gradual shift from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses."
A Wall Street Journal article titled, "Warren Buffett's Berkshire Moves Away from Stock Picking," has underscored the move in the context of Berkshire's offer to acquire Energy Future Holdings for $9 billion in cash.
In reality, the two activities are equally powerful initiatives, which Buffett would label a "two-pronged approach" to capital allocation that provides Berkshire with a "real edge."
Although Berkshire is switching its focus on acquiring operating businesses, Buffett mentioned that the gains earned on its stock and bond portfolio "has continued in the post-1998 period to grow and deliver us hefty capital gains, interest, and dividends that have provided us major help in financing the purchase of businesses."
This thought is a fragment of Buffett's basic investing philosophy, which he explained in a CNBC interview three years ago: "If you own your stocks as an investment — just like you'd own an apartment, house or a farm — look at them as a business."
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Being the investment master that he is, Buffett employs six factors that every investor should consider:
1.) Large purchases (with at least $75 million of pre-tax earnings). In this year's letter, Buffet suggested that: "The larger the company, the greater will be our interest: We would like to make an acquisition in the $5- to $20 billion range."
2.) Steady earning power;
3.) Businesses earning good returns on equity while having little or no debt;
4.) Management in place;
5.) Simple businesses; and
6.) An offering price.
The criteria are also utilized in evaluating stocks for purchase.
Berkshire's story so far
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| Photo by: Stagophile via Wikimedia Commons |
A regulatory filing last August 14 has reported that Berkshire Hathaway has sold its stake in General Electric (GE) as of the end of June.
A regulatory disclosure in May has reported that Berkshire has once held 10.6 million shares of GE. John Flannery became the CEO on August 1 after Jeff Immelt retired from his post after 16 years of service.
Investors have informed Flannery that they are seeking an extreme emphasis on running the company well and having more accountability. In a letter to employees, Flannery guaranteed that "he has heard them loud and clear," and added that he will create a strategy to address the concerns in November.
It looks like Berkshire is keeping its hand in GE's legacy part, while it has also reported a 17.5-million share stake in Synchrony Financial, GE's financing arm that was prolonged in a 2014 initial public offering (IPO). Synchrony's shares are down more than 18 percent this year, yet it has made a 4 percent comeback in Monday's after-hours trading.
Berkshire has also spiked its Bank of New York Mellon holdings by 52.2 percent, to 50.2 million shares.
Buffett has embraced the financial sector, which was forecasted for growth following years of historically low-interest rates and extra regulation.
Berkshire has announced that it will convert its Bank of America warrants to 700 million common shares, establishing itself as the bank's biggest shareholder upon the conversion's completion.
The company has also increased its General Motors stake by 20 percent in the second quarter to 60 million shares. This year, General Motors' shares are up by 1.8 percent after battling a proxy contest by Greenlight Capital.
Berkshire's GE holdings are at 0.12 percent of the outstanding shares, while GE shares are down by almost 20 percent this year.
Buffett landed a deal during the financial crisis to invest $3 billion in GE and later changed the warrants to common shares in the blue chip company in a deal that mimicked what he reached with Goldman Sachs and Bank of America.
