Use the Berkshire Hathaway Wealth Model in Your Life

Focus on Two Buckets of Value

Closeup photo of Warren Buffett
••• Eric Francis / Getty Images

Berkshire Hathaway's net worth is the result of Warren Buffett focusing on two value “buckets.” The first consists of the operating businesses in which the company holds a controlling stake. The second bucket holds marketable securities, such as stocks, bonds, and mutual funds, most of which are held by insurance subsidiaries such as GEICO, Gen Re, or National Indemnity.

Buffet began investing in Berkshire Hathaway in the 1960s, and he became its CEO and Chairman in 1970. Average annual returns were more than 21% from 1965 through 2006. Berkshire Hathaway rose from an $8 stock in the 1960s to nearly $345,000 per share on January 17, 2020. Nebraska-raised, Buffett has been called the "Oracle of Omaha."

Key Takeaways

  • Using a two-bucket arrangement like Berkshire Hathaway gives you both financial stability with extra wealth growth on the side.
  • While Berkshire Hathaway uses profitable businesses for steady income, average people can use day jobs.
  • Any side gig or profit-generating passion project can be the second bucket of this arrangement—this money can be saved up to grow wealth independently from your day job income.
  • Use of tax-deferred investment vehicles whenever possible, such as Roth IRAs and 401(k) plans.

How Does Berkshire Hathaway Work?

The two-bucket arrangement provides several major advantages to Berkshire Hathaway. First, Buffett is able to rely on cash generated by the operating businesses when stocks collapse, providing him with funds to redeploy into the market where he can buy assets on the cheap. This wouldn't be the case if he were running a mutual fund.

Buffett would have been forced to sell something that was already undervalued as the value of his holdings fell so he could buy something that was even more undervalued.

The operating businesses are insulated from daily valuations. This gives it a much more stable net worth and estimated private market value than a mutual fund. Banks are more likely to loan on a long-term, fixed-rate basis to stable businesses with real assets such as factories, retail stores, or computers. They would bet on a ​portfolio of stocks representing shares of those same companies.

You're likely to find that it's considerably easier to raise your net worth quickly by taking the same “double barrel” approach that Buffett and his long-time business partner, Charlie Munger, have made a cornerstone of their empire.

Using the System 

For most people, their primary “operating business” would be their day job. It's this stream of funds that allows you to pay your bills, buy groceries, and put gas in your car. This is also the income that provides you with your first real capital to acquire investments.

Just like any good business, you want to grow your profits—or, in this case, your wages—as much as possible with the smallest investment. You might opt for education due to the prospect of higher earnings down the road if your choices are working more hours or going back to school to become a doctor.

This leads to a golden rule of wealth building: Invest in yourself if you want to experience true financial freedom. Acquire additional skills and turn those skills into monetary gain.

Investing in Yourself

The reality is that those with specialized skills aren't being left out of the global economy, and virtually everyone has the potential to add some of these unique skill sets to our vocational toolbox.

It might be time to acquire or establish other operating businesses after you have your primary career on track and you're investing in your own skills.

Try to find things that make you “tap dance” to work, to borrow a phrase from Buffett.

An Example

Let’s say you're 25 years old and you sell paintings or perform magic at birthday parties and weddings, generating an extra $96 per week or roughly $5,000 per year. This might not seem like a lot, but it’s going to add up to more than $9,266,500 by the time you're Warren Buffett’s age if you park it in a Roth IRA.

By doing something you love and putting that money into cash-generating assets, you can retire rich. As for the bigger house, car, and other stuff you'll want along the way, that’s why you work your primary job and keep investing in your skills.

It's Time to Invest

You'll want to invest your cash in the most tax-efficient manner possible. This means taking advantage of your 401k, and perhaps an individual retirement account such as a traditional IRA, Roth IRA, or SEP-IRA. Those funds can blossom into a torrent of capital gains, dividends, and interest if they're wisely and prudently invested, all of which is plowed back in to generate even more profits.

Traditional IRAs offer tax-deferred growth—you won't pay taxes on your earnings until you withdraw them. Roth IRAs offer tax-free growth. You won't pay tax on your earnings at all if you meet the qualifying rules.

401(k) plans are also tax-deferred, and you can select your own investment options.

You can take advantage of your operating businesses to dollar cost average your positions if the stock market falls, thus taking advantage of the basic principles of value investing.