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Hi friend 👋
The Berkshire Hathaway weekend was amazing.
It was once again an amazing experience.
The track record of Warren Buffett is truly remarkable.
You could take away 99% of the return of Berkshire Hathaway…
And you would still have outperformed the S&P 500.
$10.000 invested in 1962:
S&P 500: $6 million
Berkshire Hathaway: $3.8 billion
That’s the magic of compounding put to work.
We as humans are not wired to truly understand the power of exponential growth.
If you do, it will pay you tremendously.
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During the Berkshire AGM, I learned a lot of new things which I’d like to share with you.
The intense schedule looked as follows:
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Let’s dive into the three main lessons I took away.
1. Berkshire Hathaway will outperform
Many people have asked whether Berkshire Hathaway will be able to outperform the market in the years ahead.
The short answer?
Yes they will.
While the outperformance will be lower than the decades before due to the law of large numbers…
It’s very logical that Berkshire will continue to outperform.
The secret of sauce of Berkshire Hathaway is its float.
What is float?
Float is the money an insurance company holds between collecting your insurance premium and paying out a claim. Customers pay upfront but claims come later. This means the insurer gets to sit on a big pile of cash in the meantime.
Smart insurers (like Berkshire Hathaway) invest that cash to earn returns. Often, they make more money from investing the float than from the insurance itself.
Berkshire Hathaway uses its float to invest in bonds and stocks.
You are not exactly sure what ‘float’ means?
Let me give you an example.
Just imagine you sign an insurance policy for your car today for $1.500 per year.
Under normal circumstances, you will not have a car accident today.
The average driver has a car accident once every 17-18 years.
The average damage per car accident equals $8,000-$10,000.
This means Berkshire Hathaway will receive $1.500 per year from you, but on average they will only pay out $8,000-$10,000 once every 17-18 years.
Until the car accident takes place, Berkshire Hathaway can invest these premiums in stocks and bonds.
That’s the float and it’s exactly what makes Berkshire so powerful.
Here’s the evolution of Berkshire’s float:
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Just think about it for a second…
If you do well as an insurance company and you are profitable…
You receive the float for free.
It’s free money that is not yours you can use to invest.
This accelerates the investment profits from companies like Berkshire.
It also means the following:
If Berkshire Hathaway would use it’s operating profit and float to just copy the S&P 500, by definition it will outperform the index because it’s using ‘free money’ to invest in the index.
That’s exactly why Berkshire will keep outperforming in the years ahead.
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2. This is ridiculous
Berkshire Hathaway has underperformed the index by 40% since it was announced that Greg Abel would become its CEO.