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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

You Need Rs.2 Crores To Buy ONE Share Of Berkshire Hathaway

No, there is no typographical error in the above title. Equity share of the company Berkshire Hathaway is indeed currently trading at around USD 319,600. That's more than Rs.2 crores per share in Indian currency.

In case you are not aware, Berkshire Hathaway is the holding company owned by Mr. Warren Buffett... through which he owns all his investments.

At USD 300,000+ or Rs.2 crores, this may appear to be an EXTREMELY expensive equity share to buy.

Well, that's not really the case:

At this (seemingly) exorbitant price, the P/E Ratio for Berkshire Hathaway works out to 31.40. As against this, the P/E Ratio for Dow Jones Industrial Index is currently 26.52. Hence, in relation to the overall market, Berkshire Hathaway is reasonably priced.

In fact, you will find many companies in the Indian stock markets — especially in the FMCG, Pharma or Mid-cap segment — wherein the P/E Ratio would be around 40-50. Whereas, at present, the Nifty and Sensex have a PE of around 25. That's double the market valuations.

Hence, even if you could buy these shares for a mere few hundred or thousand rupees, they are far more "expensive" than Berkshire Hathaway.

This is one lesson to learn here:

Share price in isolation is a meaningless number!

To truly appreciate what it denotes, you need to compare it with various other parameters. For example, how does it compare with the market P/E? How does it compare with the P/E ratios of the companies in the peer group? Does the expected earnings growth in the future, support this high P/E today?

Only when you analyze these questions, will you arrive at the right conclusion:

From the investment perspective, is the current share price cheap or expensive?

In line with this logic, I have often advised people not to touch the penny stocks. In terms of price, they may appear to be extremely cheap and attractive to invest. Yet, in terms of value, they would probably be zilch. They may have no underlying real and profitable business.

QUALITY mutual funds + adequate TIME = tons of MONEY

There's another key lesson to learn here:

Why is Berkshire Hathaway's share so costly?

Well, the simple reason is that Mr. Warren Buffett  
a. Does not believe in market gimmicks commonly known to us as Bonus Shares / Stocks Splits, and
b. Believes that he can do a better job of investing than you, and hence never declares Dividend.

Therefore, all the profits earned by the company — through many years since its existence — are accumulating with the company. It is these accumulated profits that are reflected in this (apparently) high share price of the company.

(Note: Before you proceed further, you must read 'Don't be fooled by Bonus Shares' to know why bonus issues and stock splits are just a financial jugglery, with no sum and substance at all.)

And, now comes the best part:

You too can become a multi-millionaire using the same strategy.

Here's the very-easy-to-implement-action-plan :
Buy a few good mutual funds — with 'Growth' option — and keep them for decades.

These schemes too have No payouts, No bonuses, No dividends.

Therefore, year after year the returns earned by these schemes will get added to the corpus. Accordingly, the Net Asset Value (or NAV) too will keep growing year after year. And, in a few decades you too would be sitting on a huge pile of money, just like Warren Buffett.

If you have any doubts about this, here is a real proof of how a particular mutual fund scheme has delivered Rs.1 crore, on an investment of mere Rs.1 lakh... How Rs.1 Lakh Became Rs.1 Crore In Mutual Fund Scheme.

In fact, this formula is no secret. I had shared it with you a few years back in my blog post 'Are you missing out on mind-boggling returns?'.

Of course, you have to be patient — very patient indeed — to let the markets and the fund managers do their job. Mr. Warren Buffett too didn't become one of the richest persons on the planet in a jiffy. There was decades of patience behind it.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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