This Warren Buffett stock just joined Apple, Microsoft and Nvidia in the $1 Trillion Club

Warren Buffett took over Berkshire Hathaway (BRK.A 1.85%) (BRK.B 1.61%) in 1965. In retrospect, he described the company as “a one-trick pony, the owner of a venerable—but doomed—New England textile operation.” Yet over the past six decades, Buffett has turned Berkshire into one of the most successful businesses on the planet.

Indeed, Berkshire hit a major milestone on August 28. It became the seventh US company to achieve a trillion dollar valuation. The other six companies are listed below by market capitalization:

• Apple: 3.5 trillion dollars
• Microsoft: 3.1 trillion dollars
• Nvidia: 2.9 trillion dollars
• Alphabet: 2.0 trillion dollars
• Amazon: 1.8 trillion dollars
• Meta platforms: 1.3 trillion dollars

Berkshire’s stock gained more than 5,600,000% under Buffett’s leadership, and no one benefited more than him. Buffett is worth $147 billion, making him the sixth-richest person in the world, and more than 99% of that total is tied to Berkshire shares.

Buffett has not reduced his stake in 18 years and has no plans to do so, which shows his belief in the company. Here’s what investors should know about Berkshire.

Berkshire Hathaway is the world leader in the insurance fleet

Berkshire Hathaway owns a diverse group of subsidiaries, from insurance to railroads and energy. Insurance is the one you should focus on first because it unlocks so much value for the rest of the company.

Berkshire Hathaway is the third largest property and casualty insurance company behind State Farm and Progressive. Its insurance holdings — particularly Geico — are particularly important because they generate cash in the form of premiums. Buffett explained the company’s benefit simply in his 2009 letter to investors: “This collect-now, pay-later model leaves us with large sums — money we call “float” — that will go into the latter to others. In the meantime, we get to invest this float for the benefit of Berkshire.”

Importantly, accumulating float has historically cost Berkshire less than nothing because the company has shown discipline in its underwriting policies. For example, the company achieved a combined ratio of 87% in the second quarter, below the industry average of 101.5%. A combined ratio below 100% indicates a profitable underwriting. So Berkshire’s underwriting activities were profitable during the quarter (and better than average), meaning the company was effectively paid to build up the fleet.

Buffett used this money to buy other companies and build a sizeable portfolio of fixed income securities (US Treasury bills and corporate bonds) and equity securities (stocks). These investments have consistently created shareholder value. Berkshire’s book value per share has risen 10.4% annually over the past three years, outpacing S&P 500annualized yield of 8.3%.

Berkshire Hathaway looked strong in the second quarter

Berkshire reported solid financial results in the second quarter. Revenue rose 1.2 percent to $93.7 billion, and operating earnings — a better gauge of Berkshire’s performance than ordinary net income because it excludes ups and downs in its stock portfolio — rose by 16%, up to 11.6 billion dollars. The driving force behind this profitability was the insurance segment. Operating profit fell modestly in the other segments.

Importantly, Buffett is allowed to buy back Berkshire shares whenever he believes the stock is trading at a discount to its intrinsic value. He spent $345 million on share buybacks in the second quarter, the least in six years, despite having a record $277 billion in cash and Treasury bills on his balance sheet.

Consequently, Buffett must have believed that Berkshire stock was more expensive during the second quarter (relative to its intrinsic value) than it had been in at least six years. And since Berkshire recently hit a trillion-dollar valuation for the first time, meaning the stock recently hit an all-time high, it’s fair to assume Buffett thinks Berkshire stock is even less attractive today.

That said, Wall Street expects Berkshire’s operating earnings to grow 17% annually through 2027. That estimate makes the current valuation of 24 times operating earnings seem reasonable. I think patient investors can buy a very small position today, but keep in mind that Buffett has pulled back on his stock buybacks.