What is a Berky and Do You Need One?

Stockpiling your way to riches wouldn’t be possible if it weren’t for Mr. Market. But it also wouldn’t be possible without a proper place to stash the excess cash that you’ll be using for your investments.

And that place is a Berky.

A Berky is an account into which recurring money is deposited that must then be allocated to investments. It’s where you’ll deposit the money you can put toward investing, so you can begin to stockpile businesses.

Simply put, if you regularly take money from your paycheck and put it into an account allocated for long-term investment, you have a Berky.

It’s the “recurring money” quality of a Berky that drives us to the strategy of stockpiling.

The Berky is named in honor of the original Berky, Berkshire Hathaway.

Berkshire Hathaway’s core business as a textile manufacturer took a downturn shortly after Warren Buffett bought it in the 1960s. Rather than shut it down and take a loss, he decided to operate Berkshire’s textile business with the minimum cash necessary to keep it alive. With the excess cash, he could buy other, better businesses. He realized if he had to find a new business to buy each time he had to allocate the recurring cash flow, it wouldn’t be long before Berkshire owned so many businesses that it, like any mutual fund with hundreds of stocks, would not beat the market.

He decided he needed to find investments that were also recurring—that is, wonderful businesses he could buy over and over. As an investor, he also knew he should want the prices of his investments to go up. But soon he discovered he in fact didn’t want that. Instead, saddled with the need to make recurring purchases of the same product, Mr. Buffett wanted prices of his investments to go down so he could afford to buy more. In other words, he found that his desire to make recurring purchases at great prices changed his strategy from investing into stockpiling.

In time, Berkshire evolved to become a business that receives—from dozens of subsidiary businesses—recurring cash from earnings. Mr. Buffett then allocates that continual cash, whenever low prices allow, into the businesses he already owns pieces of.

The key words that turn a normal investment account into a Berky are “recurring money.” With a normal investment account, you load it up and then invest it. With a Berky, you load it up with cash, invest it, and then keep loading it up with cash again and again to further invest.

What makes a Berky special is that the cash flowing into the Berky is persistent, and therefore requires recurring investments—more precisely, recurring investments into the same core group of businesses. If the cash is allocated to too many different businesses, the investor will suffer the consequences of an overly diversified portfolio.

To get around this problem of finding recurring investments, most of you pay someone else to invest your cash flow for you.

Most of you already have Berkies, but in the form of retirement accounts invested solely in mutual funds, managed by someone else. Someone who, rather than repeatedly buying a small number of recurring investments, buys a large number of onetime investments.

This is an error that too often leads to an impoverished retirement.

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Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.