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How To Amass US$50 Billion

The Motley FoolAs many of you are probably aware, thousands of Berkshire Hathaway fans made their annual pilgrimage to Omaha in the first weekend of May to attend this year’s Annual General Meeting. The Motley Fool was there too – blogging furiously for your benefit during the course of the meeting.

Four Times More Than Brunei

There was certainly a lot for Warren Buffett and his long-time business partner Charlie Munger to be cheerful about. Ahead of the AGM, Buffett’s Berkshire Hathaway reported a 51% rise in first-quarter profits thanks to a solid performance in insurance.

The company, which either owns or has interests in over 80 different businesses that span clothing to Coke and bricks to beans, is now sitting on almost US$50 billion of cash. That’s four times more than the Gross Domestic Product of Brunei.

How, you may well ask, did Berkshire Hathaway generate so much money?

Normally, you would expect Buffett – the master of the financial one-liners – to tell you. But it was left to Charlie Munger to deliver the punch line.

He said: “If we cope well with what’s on our desk, the future will take care of itself.

There is a lesson there for all of us.

Berkshire Hathaway has over the years built a portfolio of world-class, cash-generating businesses. That is the secret of Buffett’s cash pile. The cash generated by those businesses is then used to buy more cash-generating businesses that in time should produce even more cash.

The Thrill Of The Kill

It is such a simple idea but, perhaps, one that many investors still fail to appreciate.

Instead many private investors yearn for instant gratification. It seems the thrill of the kill can be more compelling than nurturing cash-generating, income producing shares for the long term.

Munger, I believe, hit the nail on the head when he alluded to the fact that we need to cope well with what is on our desk.  If we can do that successfully, then the future should take care of itself.

He was referring to the importance of researching carefully the businesses that we want to invest in. Consequently, we need to look critically at the company from the top down and from the bottom up to determine how it fits into our portfolios.

We need to build a thesis for the business to appreciate how it can sustainably generate cash, which over time will provide us with the purchasing power to buy even more cash-generating shares.

A Constant Flow Of Cash

It is a concept of Buffett’s investing philosophy that we should try to embrace. It is one that I have followed for well over a decade.

I now have a portfolio of shares that consistently delivers dividends into my account every month of the year. I may not always choose to invest the money immediately because good investing opportunities don’t happen at exactly the moment that you want. So you need to be patient.

But here is something which many people find odd. I am actually happier when the market falls rather than when it is rising. That’s because as a long-term investor I want to buy shares when they are cheap and not when they are expensive.

Let The Future Take Care Of Itself

Buffett once quipped: “If you plan to eat hamburgers for the rest of your life and you are not a cattle producer, should you wish for higher or lower prices for beef?

I think the answer should be obvious to most of us. Only if you are seller of equities tomorrow should you be happy to see share prices rise. For the rest of us long-term investors we should be happier when the price of those “hamburgers” falls.

So let’s go back to our desks and carefully research the shares we plan on buying. Buy when the market value falls below the intrinsic value and let the future take care of itself.