From Berkshire Hathaway

The latest version of Berkshire Hathaway, which released few days ago is really written to a bigger audience than usual. As always, the insights in the company’s letters are absolutely wonderful and it is my pleasure to see deeper into this and how we can apply the lessons to our own portfolio and financial life.

Buffet notes that it is easy to identify many investment areas that will grow quickly but it is not easy to predict how quickly those opportunities will evolve or how individual companies will fare over the years. The idea here is that many investment possibilities – while packed with huge profit potential are also very fleeting. Others, while a bit less exciting, have relatively certain longevity.

Buffet is also speaking to the fact that Berkshire Hathaway doesn’t want to depend solely on financing to do its deals. Quite the opposite – the company carries a large cash hoard that it can use to pursue opportunities, especially at times when the rest of the world desperately needs financing, such as the credit crunch we recently experienced. According to Buffet, having a cash hoard allows him to sleep well. My suggestion is to both keep an emergency cash fund completely separate from the investment portfolio plus a cash position ready to be deployed when new opportunities present themselves.

Don’t micromanage. Buffet says Berkshire keeps the managers of its subsidiaries on rather long lashes. And while he admits that this sometimes means problems get recognized late in the game, he believes of letting talented people perform freely outweighs the downside. In my opinion, as long as you have selected quality to begin with, there is no reason to continually tweak your positions. By all means, keep a watchful eye on things and cut dead weight when warranted.

In his final guiding principle, Buffet points out that Berkshire doesn’t want in-and-out investors but rather partners who are looking for a long term relationship. Once again, I think this is applicable to all of us. As shareholders, we should invest in firms that we want to own for the long haul.

What Buffet really likes are insurance companies, as they provide him with steady cash-flows that he can use to invest elsewhere. Regulated utilities are his second best choice, again, the idea here is predictability and major cash-flows. He also likes those conservatively managed, tends to boast recognizable brands and are focused on products or markets that are already easy to understand. Last but not least are Berkshire’s financial firms.