From a loss-making textile factory to a trillion-dollar empire: How Buffett became the stock god through Berkshire Hathaway

If you ask Wall Street which investor is the most formidable, over 50% of industry insiders will unanimously say the same name—Warren Buffett. But few people know that this legendary figure’s success is not only due to his unique vision but also critically relies on the massive money-making machine behind him—Berkshire Hathaway (stock code BRK).

Why can Buffett outperform other investment masters? The secret lies in Berkshire’s structure

Many investors look at Buffett’s precise stock market positioning and ask themselves: Why is my stock picking not bad, yet my performance lags far behind? The answer is simple—cost of capital.

Berkshire controls a powerful financial empire, including GEICO auto insurance, Berkshire Hathaway Insurance Group (BH Primary), Reinsurance Group (BHRG), and other insurance companies. These insurers collect premiums daily, creating a continuous cash flow.

This is Buffett’s core competitive advantage compared to other investors—others have to pay interest costs for their funds, while Buffett can obtain almost zero-cost capital through insurance operations. Even more cleverly, he can issue bonds in low-interest-rate countries like Japan to raise funds for investments, arbitraging the low-interest environment of entire nations.

Besides insurance, Berkshire also owns wholly owned subsidiaries in railroads, utilities, and other stable cash-flow businesses. The key is that most of these subsidiaries are not publicly listed, so only Berkshire shareholders can benefit indirectly—this is also why directly buying stocks of companies Buffett owns still cannot match Berkshire’s overall performance.

From failure to legend: the evolution of Buffett’s investment logic

Talking about Berkshire’s origins, there’s some irony. The company started as a textile mill. In 1962, Buffett bought large amounts at $7.6 per share, believing the company’s intrinsic value was much higher than its stock price. But he was wrong—the textile machinery and garments couldn’t be sold at the prices he expected. This is the worst investment Buffett himself admits to—stocks were trapped.

Rather than cut losses and exit, young Buffett chose another path: selling assets cheaply and transforming the company’s core. He turned Berkshire from a textile mill into an investment firm. This pivotal moment profoundly changed his investment philosophy.

Later, he met his lifelong friend Charlie Munger, prompting Buffett to reevaluate the essence of investing—from simply seeking undervaluation to emphasizing cash flow and enterprise value.

His new logic is clear: Why is it worth investing in banks and insurance companies? Because they share two rare characteristics:

• Extremely stable and continuous cash flow
• The larger they are, the more competitive they become (since customers trust big institutions to keep their money)

This completely overturns traditional stock selection thinking. Usually, companies slow down once they reach a certain size, but financial institutions are the opposite—bigger means safer and more attractive.

Later, Buffett’s investments in Coca-Cola and Apple followed the same logic—not because their stock prices are cheap, but because of their core competitive advantages and long-term growth potential. This is the fundamental difference between value investing and price investing.

Berkshire’s various investments also synergize—logistics help food distribution, insurance underwrites other business risks—creating a 1+1>2 effect. This ecosystem operation amplifies Berkshire’s investment returns.

Latest stock holdings reveal: signals behind the significant reduction in Apple shares

Buffett’s quarterly holdings changes are a barometer for the investment world. The most notable move in the first half of 2024 is the massive reduction of Apple shares.

Apple was Berkshire’s last major bet and also its most profitable holding. But after the 2024 Q2 report was released, Buffett made an unexpected move: reducing Apple holdings from 7.89 billion shares to 4 billion shares, nearly halving the stake, involving close to a trillion dollars.

This adjustment has pushed Berkshire’s cash reserves to a record high. The market generally interprets this as reflecting the reality that current US stock valuations are high, and quality investment targets are scarce—even Buffett can’t find good entry points.

At the same time, Berkshire’s other major holdings include: Bank of America at 11.81%, American Express at 10.41%, Coca-Cola at 7.38%, Chevron at 5.85%, etc. These companies share the traits of stable cash flow and deep competitive barriers.

BRK.A vs BRK.B: Why are there two types of stocks

When investing in Berkshire, you’ll notice two stocks—BRK.A and BRK.B—and this is no coincidence.

Initially, the A-shares soared to $30,000 per share. To improve liquidity, Berkshire issued B-shares in 1996, with a lower face value, at 1/30 of the A-shares. By 2010, B-shares underwent a 50:1 split. Now, 1 A-share equals 1,500 B-shares.

The design behind this system aims to: increase liquidity while protecting control. B-shares have only 1/10,000 of the voting rights of A-shares, so even retail investors holding large amounts of B-shares cannot easily influence company decisions, allowing management to focus on operations without being swayed by short-term investor sentiment.

Why buy Berkshire instead of directly buying Buffett’s holdings

Some ask: Since Berkshire discloses its holdings quarterly, why not just buy those companies directly? Why go through Berkshire to support a bunch of managers?

The answer is: Nearly half of Berkshire’s investments are 100% acquisitions, which are not available for purchase. Core businesses like railroads, insurance, and reinsurance are best controlled outright—Buffett’s goal isn’t stock price speculation but profit from the enterprise itself.

Another aspect is financial leverage. Ordinary investors earn 20%, but Berkshire might use 50% policyholder funds or debt to invest, amplifying the same 20% return to 40% at the Berkshire level (assuming zero interest on policyholder funds). This method of optimizing returns through financial structuring is impossible for individual investors to replicate.

Rather than trying to imitate by buying a bunch of stocks, it’s better to become a Berkshire shareholder and let Buffett manage for you.

Is it still worth investing in Berkshire now?

Long-term: Despite multiple large corrections, Berkshire’s stock price, if held long-term, can still yield good returns even if bought at recent highs. The company’s advantages are clear, and its investment value persists.

Short-term trading: Currently, the Bollinger Bands are still trending downward, with the price at the lower band. There are no clear signals for bullish trades, and short-selling opportunities are limited. If you want short-term trading, wait until the Bollinger Bands flatten before entering.

Market background: The US stock market faces economic slowdown, stagflation effects, and most companies’ inventories have returned to healthy levels but still experience sluggish sales. After the AI hype subsides, stock prices are not cheap either. Even Buffett’s partner Charlie Munger admits that finding good investment opportunities now is very difficult.

Final advice: In the current environment, both Berkshire and the overall US stock market are in a dilemma. But Berkshire’s core advantage—cheaper capital costs than others—means it doesn’t need high returns; maintaining stable growth is enough to outperform most competitors. From a long-term perspective, Berkshire remains a suitable target for regular, phased investments—patience for better entry points is key.