Two Strings to Our Bow

Core Definition

"Two Strings to Our Bow" is Buffett's phrase, crystallized in the 2020 Letter, to describe Berkshire Hathaway's unique structural advantage: unlike a pure operating conglomerate or a pure investment fund, Berkshire possesses both a collection of wholly-owned operating businesses and a massive equity portfolio of partial interests in exceptional public companies.

The "two strings" refer to these two distinct but complementary sources of value creation:

1. String One: Wholly-owned operating businesses (Insurance, BNSF, Berkshire Hathaway Energy, manufacturing, retail, services). These generate enormous, recurring cash flow that does not require external capital markets.
2. String Two: The equity portfolio of minority stakes in publicly traded great businesses (Apple, Bank of America, Coca-Cola, American Express, etc.). These compound independently and provide liquidity optionality.

Why This Matters

Most investment vehicles have only one string:

• A pure operating company holds businesses. When it needs cash, it must borrow or sell equity.
• A fund holds equities. When a position goes against it, it may face redemption pressure or forced selling.

Berkshire has both. The operating businesses generate so much internal cash flow that the equity portfolio can be held through any downturn without forced selling. The equity portfolio, meanwhile, creates optionality and compounding beyond what any single operating business could provide.

2020: The Stress Test

COVID-19 stress-tested this architecture at maximum intensity:

• Commercial businesses (See's, jewelers, auto dealers) were closed or curtailed.
• The PCC aerospace business faced an impairment.
• The airline equity investments were exited at a loss.

Yet the three largest business groups (Insurance, BNSF, BHE) generated positive cash flow throughout. No forced selling of equities occurred. The $125B Treasury bill position provided unlimited option value for acquisitions. The structure worked exactly as designed.

Connection to the Airline Mistake

The airline exit illustrates the concept's corollary: Berkshire will not prop up a structurally impaired business merely because it is a "second string" position. When the facts changed for airlines—requiring the industry to borrow $40-50B, fundamentally impacting equity value—Buffett sold entirely. The "two strings" model demands intellectual honesty about each position's standalone merit.

"We are not in the business of subsidizing any companies with shareholders' money." — Buffett, 2020 Meeting

Philosophical Foundation

The two-string structure is not accidental. It was built deliberately over six decades:

• Float: Insurance float (cost-free, permanent capital) gave Berkshire its initial "String One" rocket fuel.
• Retained Earnings: Unlike most conglomerates that paid dividends, Berkshire reinvested all earnings, compounding String One.
• Equity Portfolio: The compounding of Look-Through Earnings from String Two gave Berkshire access to the earnings of great businesses without the complexity of full ownership.

Together, the two strings represent the highest-leverage expression of the Intrinsic Value compounding model.

🔗 Connections

• Related Concepts: Insurance Float, Look-Through Earnings, Capital Allocation, Intrinsic Value, Errors of Commission
• Entities: BNSF, Berkshire Hathaway Energy, Apple, Bank of America, The Coca-Cola Company, American Express
• Sources: 2020 Letter, 2020 Meeting