Last weekend, I did what I always do at this time of the year. No, not starting to work on my taxes (that is something I will postpone a bit longer). I took the time to go through Warren Buffett’s annual letter. Every year, I always learn a lot going through it and while there is some self-promotion, it’s also filled with good stories about what has worked, what hasn’t, why he bought certain stocks/businesses as well as a unique perspective.
Creating Cash Flows
Berkshire is in many ways a conglomerate that owns dozens of different types of businesses but at its core, it was built around insurance businesses. Those tend to generate cash flow year after year both through annual profits but also through the float (he explains what float is very well in every letter).
Using the cash flow to build an empire.
With the money from his insurance businesses, Berkshire ended up buying great quality businesses that would be able to grow over time. One unique thing (especially in this era of investing) is how much of a long term view Buffett takes. He’ll always look at the price of an asset but the most important thing is not how cheap it is but rather how great of a business it is (and how easy it is to understand, etc)
Being Ready For Opportunities
Buffett is incredibly disciplined and has always been very good at keeping his money ready to jump on opportunities that would present themselves. Yes, that means holding cash which puts a drag on performances but it has paid off time after time after time. Remember how he “saved” Goldman Sachs during the crisis? That came with a very nice profit. He makes sure to always be in a position to jump on undervalued assets.
It’s hard not to be impressed with what Buffet has built over the years. He did come short in terms of performance last year but it’s important to note that with a fund the size of Berkshire, it’s much more difficult to find opportunities that will have any kind of impact on the overall performance.
How I Can Build My Own Berkshire
I’d love to be able to look back and say that I also was able to build my own little empire. It will be much smaller in size but over time could still become significant. How will I do it?
No, I don’t plan on buying an insurance company obviously:)
-Creating Cash Flows: So far, I’ve been able to build flows from my job, my online company and my stock & ETF’s. I’m also looking at buying some real estate to help increase that monthly cash flow. I do publish a monthly report about my process here.
-Using The Cash To Build An Empire: I’m fortunate enough for now to not need any of the income that’s being generated so I’m reinvesting all of it (and more) and buying more assets
-Being Ready For Opportunities: I generally try to avoid timing the market but I do always keep some money ready for any opportunities. I’m certainly thinking about buying Russia right now for example. It’s never about timing the bottom but rather about buying undervalued but quality assets.