Lessons from the Berkshire Hathaway Business Model

Started by Warren Buffet, the Berkshire Hathaway business model is that of a conglomerate holding company. The company was initially a textile company that was not performing very well, so Buffet began purchasing stock in it and eventually took over a controlling interest. Now Berkshire Hathaway owns several different companies in several different industries.

Starting a business like Berkshire Hathaway can be difficult. Most of the time, this company is doing the exact opposite that everyone else is doing. When shareholders are dropping stock and hoarding money in secure assets because of fear, this company is purchasing shares as often as possible. To follow this model on a small scale, you’d use money to invest into a local business that is cheap now, like an espresso stand, and then work to build its presence up over time so that it has multiple stands and shops in your community.

Debt Can Make Or Break This Business Model

There are good forms of debt and there are bad forms of debt. Taking out a loan to have the needed capital for an investment could be a good idea, but only if your expected returns can outpace the interest that you’ll be forced to pay on the debt. If you have a loan that is charging you 8%, for example, your returns from that loan would need to be 9% in order for the debt to be considered good.

In looking at the Berkshire Hathaway business model, it is clear to see that this company looks to avoid debt as much as possible. When debt is required to further their purposes, they will only focus on long-term loans that are fixed rates. Spending money for the sake of spending money doesn’t make sense if you’re trying to build a profitable business. A loan can make for a liquid cash reserve that is nice, but pay that loan off as soon as possible.

Berkshire Hathaway Takes a Proactive Approach

Warren Buffet has emphasized a proactive business model for Berkshire Hathaway that has paid off for them immensely. At the core of this approach is an emphasis on taking every complaint seriously. Using the espresso stand example from above, if someone tells you that your cups are leaking coffee and it is causing spills, don’t wait to investigate the complaint until the spills cause someone to get hurt. Do it now, find the problem if it exists, and then fix it.

There’s also an emphasis on keeping things nice and simple at Berkshire Hathaway. This conglomerate business might have control over several hundred different companies in multiple industries, but their plan for success is always the same. They focus on being diversified and owning stock. If you want to follow a similar business model, then stick to the basics. Don’t try to be everything to everyone. If you know how to make great espresso, then just sell espresso.

Expansion and diversification happen at natural times when revenues can justify it. Even then, however, expansion only makes sense when it works with your business plans.

Do You Have Two Buckets At the Ready?

Warren Buffet describes the Berkshire Hathaway business model as a two bucket approach. The first bucket involves business operations and the second bucket involves securities that are marketable. By taking this approach, each revenue generator can compensate for the other if one is struggling. If stock prices are low, for example, the operating revenues can be redeployed into the market so that assets can be purchased at discount levels. If the stock prices are high, then a business could be sold off from Berkshire Hathaway at a price that is overvalued instead of undervalued.

The lesson to be learned from the Berkshire Hathaway business model is this: to grow your wealth, you must be willing to invest in yourself. Investing can mean growing more revenues or implementing cost-savings measures to make current revenues stretch further.

Warren Buffet has become a world leader in the field of investing and conglomerate business management, but his system is remarkably simple. It is something that can be employed by every person in residential and professional settings. By focusing on income maximization, reducing expenses, and moving against the flow of popular thought, real wealth can be obtained.

There will always be risks in doing what others are not doing, but with great risk comes great reward.