One of the better questions submitted during the annual Berkshire Hathaway meeting concerned the poor track record of most conglomerates. Few succeeded for any length of time.
Warren’s response was illuminating. Many conglomerates were just tricks played with the stock price creating an illusion of increasing shareholder value without addressing the underlying performance of the company. “The change in the stock price is more visible, but the change in the value of the business is more enduring.”
The value of a business is dependent on its ability to generate consistent and growing profits and cash flow. It may or may not be recognized in the current stock price. When you take a longer term approach as Berkshire does the fluctuation in the stock prices is largely irrelevant.
The culture at Berkshire is to buy great companies with great management and to finance them conservatively. Must of the stock price games played by other consolidators entailed a tremendous amount of debt that left their business vulnerable to unpredictable market disruptions and put their companies in jeopardy. Often excess or poorly timed debt caused conglomerates to sell their best companies at inopportune times to raise critical cash. Berkshire is sitting on so much cash this never happens to them.
Warren refers to the businesses in his portfolio, not the stock. The value his conglomerate brings is allocate the substantial cash generated by their numerous businesses among the other businesses in his portfolio, but unlike so many other conglomerates he is less interested in flipping a company to take advantage of short term market swings.
The business is much more than the stock.