Considering this favorable tailwind, Berkshire (and, to be sure, a great many other businesses) will almost certainly prosper. The managers who succeed Charlie and me will build Berkshire’s per-share intrinsic value by following our simple blueprint of:
1. Constantly improving the basic earning power of our many subsidiaries
2. Further increasing their earnings through bolt-on acquisitions
3. Benefiting from the growth of our investees
4. Repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value
5. Making an occasional large acquisition
That is Buffett’s entire blueprint and it is very powerful. He has been following this basic blueprint for decades and has become one of the wealthiest people in the world. This blueprint allows him to focus on what he feels are his most important tasks. Notice that each item in his blueprint is focused on increasing earnings…or income, as we like to call it.
After reading this, I decided to re-write his blueprint for myself. I’m obviously not a public company and I thankfully don’t have any outside shareholders. Here is my version of his blueprint as it applies to my goals:
1. Constantly improve the basic earning power of my rental properties.
This could be raising the rents on an consistent basis, or it could be making strategic improvements to increase the rental value of properties when they become vacant. If you have a large portfolio of properties and you raise the rent by $20 a month, this small increase can translate into a larger increase in earning power. ($20 a month * 50 properties equals $1,000 a month, or $12,000 a year.) This increase in earning power can obviously be reinvested into additional income producing assets.
2. Further increase earnings through new mobile home investments.
When a company owned by Berkshire buys another company, he refers to this as a bolt-on acquisition. My twist on this is to use the income from existing investment properties to buy a new investment properties. This is my bolt-on acquisition and this is how I typically accumulate new properties. I try to buy one new property each month using the income received the previous month.
3. Benefit from reinvesting the income from these properties into high-quality dividend stocks.
“Investees” to Buffett are the stocks of other companies Berkshire holds as long-term investments. His main four stock investments are: Coke-Cola, IBM, Kraft Heinz, and Wells Fargo. Each month, I plan to accumulate additional shares of high-quality dividend stocks. These stocks will be held long-term allowing the dividends to compound into new shares of the same stock.
4. Making an occasional large real estate acquisition.
I’ll pursue larger investments occasionally and only if extremely attractive from a return on investment point of view. Larger investments require more work and this is why I’m not pursuing them as the main part of my investing approach. Smaller investments flow very well in my current system requiring very little extra work.
Buffett’s blueprint is designed around increasing income and it just might be a great blueprint for us to follow, too. I would suggest thinking about his blueprint and rewriting for yourself around your goals. This blueprint has worked very well for Buffett. Who knows what it might do for us?
You can find Bershire Hathaway’s 2015 Shareholder Letter here.