Every investor wishes he had bought Berkshire Hathaway shares 25 years ago. If you had $10,000 invested with Warren Buffett in 1982 the shares would be worth $1,280,000 in 2006. Berkshire Hathaway shares are undervalued at the moment and will have consistent and above average growth for years to come, but the law of large numbers dictates that the company is too big. You cant get the same 25-30% annual returns from Berkshire Hathaway anymore. We missed out on Berkshire Hathaway but we could look for companies that may turn out to be “The Next Berkshire Hathaway”.

What to look for in the search for the next Berkshire or Buffet

  • Company is run by a Brilliant money manager(s)
  • It follows value oriented investing
  • The investments are diversified across industries so a downturn wont affect the business.
  • Insurance backed so the company can use float generated with positive underwriting to create wealth. Free money is always good.
  • High levels of Management ownership, which orients management goals with those of the shareholders
  • Focus on long term growth of Shareholder value and not on keeping the dumb anylasts on wall street happy every quarter.

It will be nearly impossible to find a perfect match but we can look for companies that match 2 or more criteria.

1. Sears Holdings led by Eddie Lampert (SHLD).
Eddie Lampert started ESL investments in 1988 with 28 million. ESL has averaged 28% a year for the last 18 years. Eddie Lampert is one of the best money managers in the world. Recently he took a bankrupt K-mart and turned it into a cash cow. He merged k-mart with sears to form sears holdings. The stock has been on a tear since Kmart came out of bankruptcy, it opened for trading at $16 in May 2003 and now trades at $160. Eddie searches for companies that are seriously undervalued, he also sticks to companies whose industries he understands. The board has given Lampert the freedom to invest the profits from sears holdings any way he sees fit. Just as Buffett did with Berkshire Hathaway in the 60s. If any person will take over from Buffett as the greatest money manager of the current generation it looks to be Eddie lampert, and the vehicle through which he will reach there is Sears Holdings.

  • Brilliant money manager(s) - Yes
  • Value oriented - Yes
  • Diversified - Not yet but board has given Eddie Lampert the flexibility to do so.
  • Insurance backed - No
  • Management ownership - Yes
  • Long term growth - Yes

2. Brookfield Asset Management (BAM).
A canadian asset management company which focuses on industries that need lots of capital such as real estate, natural resources, energy and financial service. Assets include 70 office properties, 120 power-generating plants, thousands of acres of timber and a property development operation under the Brookfield brand name. The stock has moved from $8 to $50 in 5 years thanks to the brilliant investments its management has made.

  • Brilliant money manager(s) - Yes but not in same league as Buffett.
  • Value oriented - Yes
  • Diversified - Yes
  • Insurance backed - No - Brookfield uses low cost debt which is the next best thing to insurance.
  • Management ownership - Yes
  • Long term growth - Yes

3. Leucadia National Corp led by Ian Cumming (LUK).
Leucadia is an investment company run by two brilliant money managers Ian Cumming and Joseph Steinberg. The company invests in anything that can make the shareholders money. Their preferred investments are generally turnaround plays. Leucadia will buy large stakes in a distressed company. They revive the company, improve performance and then sell it off at a nice profit. The company is currently diversified into telecom, manufacturing, healthcare, banking, real estate and wineries.

  • Brilliant money manager(s) - Yes
  • Value oriented - Yes but riskier than Berkshire as Ian cumming seems to go for higher risk companies
  • Diversified - Somewhat. Cumming occasionally likes to make extremely big investment bets.
  • Insurance backed - No
  • Management ownership - Yes
  • Long term growth - Yes

4. Markel (MKL)
Markel is an insurance holding company. The company is a mini Berkshire any way you look at it. Extremely steady and consistent growth. Like Berkshire the company has never declared a split and the shares have risen from their 1986 IPO price of $8.33 to nearly $400 in 2006. The company holds diversified investments in a large number of stocks. The top 10 current holdings are Berkshire Hathaway, Carmax, Diageo, Fairfax Financial Holdings, Anheuser-Busch, General Electric, White Moutains Insurance, Citigroup, Exel Ltd, Brookfield Asset Management. Its funny how they seem to like Berkshire and other companies that look like Berkshire.

  • Brilliant money manager(s) - Yes but not in the same league as Buffett
  • Value oriented - Yes
  • Diversified - Yes.
  • Insurance backed - Yes
  • Management ownership - Yes
  • Long term growth - Yes

5. White Mountains Insurance (WTM).
This company has Buffetts blessings. White Mountains is 16% owned by Berkshire Hathaway. The way the company operates it seems to be another mini Berkshire. The operating principles, view of the management and their operating principles are an exact match with Berkshire.

Operating Principles - White Mountains cares most about the following.

  • Underwriting Comes First
  • Maintain a Disciplined Balance Sheet
  • Invest for Total Return
  • Think Like Owners

Other Excerpts - “Intellectually we really don’t care much about leaving our capital lying fallow for years at a time. Better to leave it fallow and to wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we just all went to play golf.”

“We also admire Benjamin Graham who said: “In the short run the market is a voting machine; in the long run it is a weighing machine.”

  • Brilliant money manager(s) - Yes but not in the same league as Buffett
  • Value oriented - Yes
  • Diversified - Yes
  • Insurance backed - Yes
  • Management ownership - Yes
  • Focus on long term growth - Yes

6. Interactive Corp led by Barry Diller - A Futuristic Berkshire Hathaway
Barry Diller (the CEO of IACI) says the comparison is “undeserved at present but not my hopes and dreams”. He also says that the web will help IACI fit its pieces together in a manner that Berkshire’s parts from Insurers to Manufacturing, just cant. IACI has sales that will reach 7 bilion this year and a ton of cash but the company trades at just 8.5 billion. The company is spread across a lot on industries including Retailing which includes Home Shopping network; Ticketing with Ticketmaster; Real Estate with Lending Tree, RealEstate.com and others, Online search includes Ask.com, Excite, etc..

I know IACI is a far stretch but the company is undervalued, has leading sites in their business segments a great CEO.

  • Brilliant money manager(s) - Barry diller is an ok money manager but hes a brilliant CEO
  • Value oriented - If theres such a thing as a value based investment on the internet
  • Diversified - Yes
  • Insurance backed - No
  • Management ownership - Yes
  • Focus on long term growth - Yes

Conflicts : I own shares of Berkshire hathaway and Interactive Corp.