The Master: Warren Buffett 4

To insurance and beyond

Neither Berkshire nor Buffett made it very far in the textile business. No "Buffett" line of designer towels ever made it to the shelves at Nordstrom's (although they's be worth a lot today, too, if they had!). Instead, Berkshire is now the world's largest investing pool.

The Berkshire's formula is as follows:

• Employ cash flows from businesses owned within the holding company.
• Buy stocks and bonds in the open market.
• Use the cash flow to buy businesses outright - preferably cash rich and cash generating - to build the investment pool and increase book value.
• Acquire solid insurance companies to provide cash flow and further build investing float and to insulate from downturns.

In short, Berkshire as a combined insurer and investment holding company is a fabulous investment ship and capital allocator - especially when you have someone of Buffett's investing prowess at the helm.

From socks to stocks

Gradually, Buffett shifted his emphasis from small, opportunistic, turnaround situations, often of a short-term nature, to longer-term, large cap investments - he even acquired whole companies when the numbers were right. He did this with a clear eye on tapping the growth potential of the major companies and major brands that are abundant in American life. No more buying "cigar butts with one puff left in them," such as trading stamp companies, as he often did in the mid-1950s.

Berkshire Hathaway was off to the races with a winning portfolio of value investments, a world-class pit crew, and high-octane fuel provided by the insurance business.

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