In Search of Warren Wisdom, Part 3

Editor's Note: This is the last part in Jeff Bronchick's discussion of the Berkshire Hathaway (BRK.A Quote) annual meeting. Part 1 appeared Monday, Part 2 Tuesday.

The Insurance Racket

Warren Buffett made it clear that he considers insurance a good business for Berkshire, but a generally lousy business for most middle-of-the-road insurance companies. He also made an interesting comment about acquisitions: He would rather have or acquire $20 billion of new "float" with a cost of 1% or 2% (meaning a combined ratio of 101 or 102) than he would $100 million of float generated by a combined ratio of 93. What's the "float?"

Float is, of course, the oldest temptation in the insurance industry: CEO's are infamous for saying "just another point of cost will get me x billion of float" until they are drowning in underwriting losses. While Berkshire will always have its own insurance problems from time to time, I don't think anyone is really sweating out that the problems stem from the greed to buy another dollar of business.

The D&B Opportunity

Berkshire Vice-Chairman Charlie Munger was unusually vocal about a holding of mine, Dun and Bradstreet (DNB Quote), in which I believe Berkshire is up to nearly a 15% position. That's one of the largest percentages that I have ever seen Berkshire take in the past decade, and the reason is Moody's. Buffett and Munger talked about "buying business castles with the widest moats" -- the moat metaphor indicating an impregnable business position -- and it does seem that Moody's would be a lovely fit within the Berkshire financial empire. The credit reporting business was duly noted as a tougher piece to value, but in my humble valuation opinion, Moody's is worth $25 or so per Dun & Bradstreet share, leaving the core credit business valued at next to nothing. Go Berkshire. ...