The ‘Build Your Own Berkshire’ Strategy

Today we’re going to take a quick look at the principles and the money management system we used to turn our family and small business finances into multi-generational wealth. Our goal is to create a financial fortress around ourselves and our descendants.

How do we do that?

We want to build a collection of assets large enough to produce investment income for at least as long as our grandchildren are alive. The trust that we are building will be designed to pay for our decedent’s needs but not their wants.

For guidance, we turned to none other than Warren Buffett’s company, Berkshire Hathaway.

Warren Buffet said it better:

“The perfect inheritance is enough money so that [children] feel they can do anything, but not so much that they could do nothing.”

Your goal will be different than ours. The strategy works whether you want to get rich, donate to charity, or buy a boat.

So let’s get on with the strategy, shall we?

The Archetype: Berkshire Hathaway In A Nutshell

Berkshire Hathaway is like no other large company on earth.

It’s a multinational conglomerate holding company headquartered in Omaha, Nebraska. As of 2021, the company had over 377,000 employees across its subsidiaries and operating businesses. These subsidiaries and operating businesses include various companies in industries such as insurance, finance, retail, and manufacturing.

That’s all well and good, but it’s not why we choose to model our business finances (and our personal finances) after them.

See, people generally have the wrong idea about Berkshire.

Most people attribute its success to the investing genius of Warren Buffett, but I disagree.

Don’t get me wrong, Buffett is an investing genius (he’s widely considered the best investor alive) but the real magic of Berkshire is actually simple (and still would have worked without Buffett’s investing genius).

The real magic of Berkshire is that they use simple rules to determine where their money will gain the most benefit from the power of compounding.

And those rules are so simple, we (you, me, anybody) can use them.

What are the rules?

  1. Know Your Goals
  2. Focus on Look-Through Earnings
  3. Grow Looking-Through Earnings by your goal amount each year

First, You Must Know Your Goals

Berkshire’s goal is to grow their look-through earnings by 15%, so we figured we try to match that.

To do this Berkshire:

  1. Works to increase its operating earnings.
  2. Works to decrease its expenses
  3. Invests in passive productive assets

So how to be we, as mere mortals, accomplish the same thing?

We:

  1. Try to increase our income through raises at our day jobs or (more commonly) by growing our side business.
  2. Look for ways to save money around the house, shop smarter, use envelope budgeting, etc.
  3. Invest in passive productive assets (usually the S&P 500)

Second, Focus on Look-Through Earnings

Wait what are look-through earnings?

Look-through earnings is a measure of a company’s profitability that takes into account the company’s investments in other businesses. LTE is used to assess the performance of companies that have significant investments in other businesses, such as holding companies (like Berkshire) or private equity firms.

Buffett believes that LTE is a more accurate measure of a company’s profitability than traditional financial metrics, such as earnings per share (EPS) or return on equity (ROE) because it takes into account the profits of the company’s investments in other businesses.

Short version: You add together operating income and the earnings of your investments.

Here’s an example:

We own 1,000 shares of XYZ.

XYZ has earnings per share of $10.

Our share of XYZ earnings is $10,000 per year.

We make $30,000 per year from our day jobs after we pay all taxes and expenses.

Our look-through earnings = $40,000 per year.

We only care about increasing that number by 15% each year.

We mostly accomplish that by reinvesting our profits to either grow our side business or increase our earnings from our investments.

And here’s a bonus: When you focus on the look-through earnings of your investments, you become immune to market meltdowns. Because I don’t really care about the stock price on any given day or year. I only care about the earnings those companies achieve.

Third, Invest Wisely

If there is anything you take away from this site, let it be this motto: Turn liabilities into assets.

That is the whole objective of the strategy. It’s the greatest financial mantra you can adopt. In it is all the freedom you’ve ever dreamed of.

The way we see it, there are two important definitions:

  1. Liabilities are anything that burns money (Yes, even cash)
  2. Assets are anything that earns money

As money comes in from our day jobs and from our side hustles, we need to turn that cash (which we see as a liability) into an investment that earns passive income (an asset)

What do we invest in? One of two things:

  1. The whole US stock market, or
  2. The 500 largest companies in the US Stock Market

We keep it simple. We keep it predictable. We buy shares of VOO (Vanguard’s ETF that tracks the S&P 500).

And when we buy those shares, we know how much we are adding to our Look-Through earnings.

Fourth, Rinse and Repeat

Month in and month out. We get paid. We invest. We track our look-through progress and update of goals.

The Checklist

  • Do you know your investment goal?
  • Do you have your investment vehicle chosen?
  • Have you set up your brokerage account?
  • Have you chosen your side hustle?

Closing Thoughts

To learn more about what we do here and how to achieve the BYOB dream, check out:

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