Leaked: Warren Buffett's Recipe for Financial Success

All too often, we only think about the businesses Berkshire Hathaway runs that we know by name. Fruit of the Loom. Geico. Heinz. But one of its businesses you've likely never heard of has a simple but remarkable history of success.

The big business that could
In May of 2006, for $4 billion, Berkshire Hathaway agreed to acquire 80% of Israel-based International Metalworking Companies (IMC), which provides metal cutting tools through ISCAR and other brands for business across the globe. The remaining 20% would be owned by the family. And it was in the 2006 letter to shareholders detailing why Berkshire made the purchase when Buffett wrote the quote found above.

Eitan Wertheimer, the chairman of IMC and member of the family who started it, wrote Buffett a 1.25 page letter asking if he'd like to buy it in 2005. In Buffett's own words, it has a "simple and profitable business model"; he and Charlie Munger couldn't turn it down when the opportunity to acquire it arose.

ISCAR makes a variety of small tools that are used by customers -- largely in the automotive, aerospace, and mold industries -- that operate massive machines for metal working. And while it's "groove-turn," "turning & threading," "hole making," "milling," and "tool holding," businesses won't grab headlines, its recipe for success should.

The recipe for success
In 2009, as the economy spun downwards, Buffett noted even though Iscar's results were "down significantly from 2008," he continued, "when manufacturing rebounds, Iscar will set new records." That didn't take long: Its profits rose by a staggering 159% in 2010.

So, how did it do that? Let's take another look at Buffett's words:

ISCAR makes money because it enables its customers to make more money. There is no better recipe for continued success.

Buffett has long touted the benefit of GEICO providing the least expensive insurance policy -- an unwanted requirement for Americans -- which has allowed it to take over the auto insurance industry little by little. In this year's letter, he said:

GEICO's cost advantage is the factor that has enabled the company to gobble up market share year after year. Its low costs create a moat -- an enduring one -- that competitors are unable to cross.

And while it's a touch different, it's this business model that has allowed ISCAR to be successful. It provides value to its customers by ensuring there is a true benefit to their bottom lines when they use its products. It may not offer the cheapest tools, but it offers those with the most value.

Taking a step toward another Berkshire Hathaway investment consider, USG , or United States Gypsum Corporation. This non-exciting business manufactures drywall and other construction materials for residential and commercial properties. Like ISCAR, it isn't anything exciting, but it provides, "low-cost capacity and market-leading brands," which allows it to provide value to its customers. And as a result, it's "a leader in each of its three core businesses."  

So why bring up USG? While it too may be a small company that doesn't grab headlines, it's clearly one Buffett believes in. The $1.1 billion common stock position held by Berkshire Hathaway represents an ownership stake of more than 30%. 

The key takeaway
Last year, Warren Buffett shelled out $2.1 billion to buy the remaining 20% of IMC, meaning its value had more than doubled since 2006. Buffett said it "has enjoyed very significant growth over the last seven years," and he was "delighted to acquire," the remaining 20%.

Before you make your next investment, ask yourself if that business provides true and immediate value to its customers. If it does, the odds of a owning a long-term winner tip in your favor.  

Warren Buffett just bought nearly 9 million shares of this company
Buffett likes to buy companies neither you nor I have heard of, but offer great things to their customers. Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour. And the thing is, it too provides value to the people who use it. And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

The article Leaked: Warren Buffett's Recipe for Financial Success originally appeared on Fool.com.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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