Every year, I read the annual Berkshire Hathaway shareholders letter, written by Warren Buffett. I highly recommend that anyone interested in the markets take the time read it. It’s an interesting long term perspective that we rarely see. Why would someone want to build a mini-Berkshire? I guess having a fund that grows steadily over time, that outperforms stock indexes such as the S&P500 would help me tremendously in my passive income objectives.
What I Do Not Want From My Mini Berkshire
Two main things that I would not look to replicate:
–Having shareholders: Buffett and Berkshire have shareholders that they invest for and while using other people’s money is a great way to get bigger, it’s not something I’d look to do at this point.
–Paying Dividends: While Berkshire does not pay out dividends to shareholders, I do expect to depend on income from my investment fund at some point and would thus need to rely on some income at a certain point.
Similarities Between My Mini-Berkshire And The “Real” Thing
Positive cash flow: Berkshire gets very important cash flows from its insurance businesses that generate cash flows. I would also build a strong foundation on the back of income generating assets such as dividend stocks, ETF’s, real estate, etc. This would enable me to reinvest money, but also remain cash flow positive even when I end up living off of the portfolio.
Hold Cash: One of the unique aspects of Berkshire is how much cash it holds at all times. This can be a drag on returns but it also makes it possible to get good opportunities when there is panic. Buffett has frequently been buying big assets when everyone else was trying to get out, jumping in at very good prices. Having a lot of cash opens up opportunities and makes it possible to be more flexible.
Buy Based On Fundamentals: You might say that most of Berkshire’s investments are boring and it’d tough to argue. I do like buying companies that I understand and that I can get a good feeling on the valuation I’m paying and what I’m actually buying.
Investing in sound businesses rather than go bargain hunting: One mistake that Buffett has said he makes is when he goes bargain hunting. Buying great businesses at good prices is good. But buying average businesses at below-market prices is bad. I’m not interested in buying such businesses. As I’ve discussed in the past, it’s very difficult to try catching a falling knife.
Needs to outlive me: I don’t think many doubt that Berkshire will outlive Buffett. I certainly plan on having my mini-Berkshire also outlive me. Hopefully, it can give my kids a good start in life
The more I think about this, the better building this type of fund makes sense to me. What about you?