Frank,
I guess you could say there's leverage, and then there's what he
does. Like most of his other activities, he does leverage better
than everyone else. Most people borrow money at a certain interest
rate in hopes of using that money to get a higher rate of return, and
thus turn a profit (while employing very little of their own capital
in the process). I believe he does this sometimes, when he finds
interest rates favorable (I read that he'll sometimes borrow money
if rates are attractive even if he doesn't yet need it...that way if
a rare buying opportunity comes along, his "gun" is loaded, and the
"bullets" were cheap...)
A far greater source of leverage are Berkshire's insurance
subsideries, like you said. They generate a great deal of premium
income, from underwriting. Much of that is later required to pay
claims made on the polices. But in the meantime, this "float" is
free money for Berkshire - an interest free loan! Now that's what
I call leverage!
As for high rates of return, (I think his long term return on
investment is estimated in the low 20's) he uses that "borrowed" money
to buy great companies at bargain prices. A company doesn't have
to grow at 100% a year like Ascend to get it's stock to go up that
much. A great business with decent growth can give you that same
return if you can buy it really cheap. Buffett's just better than
anyone at recognizing when great companies are cheap...
Anyway, that's how I see it in a nutshell... |
