Berkshire Hathaway rarely starts new businesses, preferring to use its expertise to buy strongly and passionately managed existing businesses. But it recently started an arm to insure municipal bonds.

Within 90 days hundred of clients sought insurance from Berkshire, many of them already insured by AAA rated insurance companies. This meant that the reputation and strength of Warren Buffet and Berkshire meant more than the AAA rating from insurance companies. Based on its reputation Berkshire entered a market it was not previously in, served by experienced players and became the dominant player in ONLY 90 days.

This is an incredible display of the value of a solid reputation. It is an amazing feat in the world of business.

It is also a statement on how meaningless the value of insurance or security ratings have become. Municipalities bought insurance to give comfort to the bond buyers, but the market was losing faith in the viability of the insurers, increasing the yield of the bonds (to cover the perceived higher risk) and the interest costs of the municipalities.

Holders of Berkshire’s insurance saw their yields and interest costs decline.

Warren Buffett made the security ratings business obsolete in one quarter; he showed that sound and conservative business practices are more valuable than ratings.

In the land of the blind the one eyed man is king. Buffet of course has both eyes, and a third in the back of his head and 20/20 vision in every one of them.

tips to Gary Watkins who attended the Berkshire Hathaway meeting and shared his experience.
Gary is the owner of Banyan Capital Management and is a true value manager in the best tradition of Benjamin Graham, Warren Buffet’s mentor. More about Banyan here.

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