In his annual letter to shareholders, Warren Buffett gives us one key advice, we must never forget — to keep our business secured.
"Mistakes in assessing insurance risks can be huge and can take many years to surface," Buffett wrote.
Not only putting the businesses' financial performance in risky investments but risks such as natural disasters, cyber attacks, among other unpredictable risks, can get the shares of the losses and they will be big – very big.
"A major catastrophe will dwarf hurricanes Katrina and Michael will occur – perhaps tomorrow, perhaps many decades from now," Buffett said.
Here's how his company, Berkshire Hathaway, does it:
Buffett's company, Berkshire Hathaway, gets its final funding sources from 'deferred income taxes'.
As unusual as it may sound, despite deferred income taxes being a liability, these liabilities are eventually paid but remain interest-free.
Around $14.7 billion of our $50.5 billion of deferred taxes of the company are from unrealised equity holdings. This takes us back to what Buffett advised earlier: "Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all."
Since the firm has invested in companies that are credible, the interest-free “loan” allows the firm to have more money working for them in equities than some other case. And when the gains are realised, the tax rate will continue and with the difference in what has been gained and the tax that has to be paid, Berkshire makes its profit."The front-ended savings in taxes that we record gradually reverse in future years. We regularly purchase additional assets, however. As long as the present tax law prevails, this source of funding should trend upward," he wrote, adding that, "Our job is to put the money retained to good use on the left-hand side, by adding attractive assets."