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The Motley Fool: Berkshire Hathaway built to last

The Motley Fool

You may wish you could invest like Warren Buffett, but you might not realize that you can invest in his company – and benefit as he increases its value over time. Indeed, he has led Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) to average annual stock-price gains of about 10 percent over the past 20 years – though the growth rate has slowed some, due to the company’s size. (It was recently ranked fourth in the Fortune 500.)

Berkshire Hathaway is a complicated beast. At its core, it’s an insurance company, but it also owns big stakes in a bunch of stocks (such as 9 percent of Coca-Cola, 9 percent of Wells Fargo, 8 percent of IBM and almost 15 percent of American Express). It also sports dozens of companies that it has bought outright, such as GEICO, Dairy Queen, See’s Candies, Benjamin Moore, Pampered Chef, Fruit of the Loom, Acme Brick, Clayton Homes, McLane and the entire BNSF railroad. Its energy operations are massive, with heavy investments in wind power, solar power and natural gas pipelines.

A great feature of Berkshire is that Buffett can take cash generated by some of its companies and redirect it to other companies that need capital most. The company pays no dividend, but Berkshire is built to last – and grow. (The Motley Fool has recommended and owns shares of Berkshire Hathaway.)

Ask the Fool

Q: How does a company decide how big a dividend to pay? - H.T., Gainesville, Florida

A: It depends on how management thinks it can best deploy company profits. Using some of that money for dividends is one option, but the company might also want to pay down debt, buy another company, build more factories, hire more workers or buy more advertising, among other possibilities. Those actions can reward shareholders even more than dividends would by helping the company grow and become more valuable.

Slower-growing companies or those generating gobs of cash are more likely to pay a dividend, especially when they don’t see more attractive alternatives. Young or quickly growing companies often don’t pay dividends, instead spending all the money they can to grow.

Dividend amounts tend to stay put for months or years. Healthy, growing companies will usually increase their payout periodically. To see a list of promising dividend-paying stocks we’ve recommended, try our “Motley Fool Income Investor” newsletter for free (at fool.com/shop).

Q: How should I best place “stop” orders with my brokerage? I’ve placed some stop orders to sell various stocks if they fall about 15 percent below a recent price. This has resulted in some stocks getting sold rather quickly. Am I doing something wrong? – L.K., Livonia, Michigan

A: Stop orders are meant to protect you if a stock suddenly plunges. But they can also eject you from stocks with great futures that just experienced temporary drops. If you’re planning to hang on to a stock for years, it can be good to simply expect some volatility and avoid stop orders. If you’d rather have some protection, set your stops at perhaps 25 percent or 30 percent.

My Dumbest Investment

My dumbest investment was buying shares of US Airways when it was near bankruptcy. I got wiped out along with many others. – B.F., online

The Fool responds: It can be tempting to invest in nearly bankrupt companies when their stocks fall to tantalizingly low levels. But just because a stock has plunged from, say, $45 per share to near $4 per share doesn’t mean that it can’t fall further. Indeed, the fact that it dropped so much means that it’s likely in trouble.

Some companies are facing only temporary struggles, but many others face issues likely to drive them out of business, such as if they’re not earning enough to pay debts, or their competitors have taken much of its business. (When US Airways filed for Chapter 11 protection in 2002, for example, it was carrying a lot of debt and carrying fewer passengers due to post-9/11 fears.)

It’s also important to understand that when a company goes through bankruptcy, even if it eventually emerges from that and goes on to succeed, its original shares of stock will likely be canceled – leaving shareholders with nothing – and new shares of stock will be issued.

When a company goes through bankruptcy, its common stock holders are last in line to collect anything, after creditors, bondholders and holders of preferred stock. Avoid companies in or near bankruptcy. There are plenty of safer and more promising investments.

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