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I have been investigating for years the way Buffett is doing businessWhat I found is that the basis of Buffett’s system is to have a cheap source of funds, to lend money at a high price to enterprises ( he is doing strictly B2B business ) and to design deals in a way that he will never loose moneyAlternatively he can give administator status ( I mean to have an access to huge amount of funds ) to people he trusts, witness Ajit Jain in the Re business - National Indemnity and Gen Re-, Tom Nicely at Geico, Peter J. Eastwood at Specialty Insurance, the two deputies Combs and Weschler, Matthew K. Rose at BNSF, Mark Donegan at Precision Castparts, Gregory E. Abel at BH Energy, the Pritzker’s Marmon, Wertheimer’s Iscar…The magic of Buffett is to make routinely 20% yearly. 20% for 50 years means a multiplicative factor of 1.2^50 so nearly 10,000, now Buffett is having his 6th decade into the business, and 1.2^60 means a factor of 60000His basic principles is to have a low cost source of funds, to provide funds for financing of others activities at a high cost and to defer as much as possible taxesIn the Owner�s Manual Warren summarize as follows “Besides, Berkshire has access to two low-cost, non-perilous sources of leverage that allow us to safely own far more assets than our equity capital alone would permit: deferred taxes and float”.As a low cost fund, Buffett uses the float created by P&C insurance industryThe real cost of Buffett’s float is actually negative, as he puts it “ we are paid to handle other people’s money ” in 2016 letter to shareholders Buffett outlined that “Berkshire has now operated at an underwriting profit for 14 consecutive years, our pre-tax gain for the period having totaled $28 billion” for a float now reaching 100b$.Reinsurance and Quota Share boast his free capitalIAG and Berkshire Hathaway have entered into a 10-year whole of account quota share arrangement effective 1 July 2015. Berkshire Hathaway will receive 20% of IAG’s consolidated GWP and pay 20% of claims. Berkshire Hathaway will also reimburse IAG for its share of operating costs and pay a percentage-based fee. Berkshire Hathaway takes approximately 3.7% stake in IAG via $500 million placement, 89,766,607 new fully paid IAG ordinary shares at $5.57 per share.IAG forms strategic relationship with Berkshire HathawaySo IAG business is heavily concentrated in Australia & New Zealand, with the quota share agreement, a part of the business is transfered to Berkshire in exchange of a stake in the company, with risk and volatility reduced IAG is able to develop business elsewhere.Berkshire has been providing some reinsurance policies to AIG ( $3.5bn asbestos risk in 2011, $20b deal in 2017 which provide reinsurance to U.S. commercial long-tail exposures for accident years 2015 and prior certainly because 2016 and later turned into a soft market-, which includes the largest part of AIG’s U.S. casualty exposures during that period ) and has hired 4 top AIG executives ( Peter Eastwood, David Bresnahan, David Fields, Sanjay Godhwani ) to start BH Specialty Insurance that is a concurrent of AIG’s LexingtonBuffett did the same, ie to build an operation from scratch, when he proposed an insurance to the monoliners Ambac, MBIA and FGIC Buffett's $800bn monoline lifeline boosts global stockmarketsOn the other side when Buffett provides funds, in my view, he aims a return of 15%, why 15%? it shows up in the following dealHarley-Davidson ; $303 million which pays out 15% interest rateI went to analyze a lot of Buffet’s dealsUSG Corporation : $300 million loan with an interest rate of 10 percent a year, with an early termination fee and convertible into USG common stock at the price of $11.40Assuming an affirmative vote of USG's shareholders, the notes will become convertible into shares of USG common stock at a conversion price of USD 11.40 per share. If shareholder approval is not obtained before the 135th day after closing of the sale of the notes, the notes will bear interest at 20% per annum until after shareholder approval is obtained.Goldman Sachs : $5 billion in preferred with a dividend of 10 percent. It will also get warrants to buy another $5 billion in common stock over five years at the price of $115General Electric: $3 billion of preferred stock, which pays out 10 percent interest and warrants to buy $3 billion worth of stock at a price of $22.25 a share.Bank of America : $5 billion of preferred shares which pays out 6 percent interest, with 5 percent termination fee and warrants exercible over the next 10 years that allow to purchase $5 billion worth of BofA common stock at $7.14 per share.Home Capital : 40% stake at 10C$ -33% discount over the market- and a credit facility of 2b$, secured against a portfolio of mortgages originated by Home Trust, yielding 9% if used and 1,5% if idlehttp://business.financialpost.co...Mars-Wringley : The deal has been financed by creating a new company, which will keep the Wrigley name, in which Mars will receive an 81 per cent stake. Berkshire Hathaway will own the remainder of the company, a stake worth just over $2bn. Berkshire received preferred shares worth about $2.1 billion, which paid a 5 percent annual dividend, and $4.4 billion worth of bonds that carried a hefty 11.45 percent interest rate.Burger King - Tim Hortons deal : Berkshire Hathaway agreed to invest $3 billion for a preferred stake in the new company paying an annual dividend of 9%.Dow Chemicals - Rohm & Haas: $3 billion in April 2009, annual dividend of 8.5 percent, conversion into common equity is contingent on Dow's shares trading above $53.72 per share for any 20 trading days in a 30-day window after 2014 ( see a special analysis later )Swiss Re : In January 2008, it would receive 3 billion Swiss francs, or about $2.6 billion, from Berkshire Hathaway. It entered a quota share arrangement with Swiss Re through which it acquired 20 percent of its new and renewed property and casualty business in exchange and acquired 3 percent of its shares at the same time.The pattern is that Berkshire is acting as an alternative to federal intervention ( GE, Goldman Sachs… ) and as an alernative to banking financement ( mainly a competitor of JP Morgan and Goldman Sachs ) for business deals, Berkshire is willing to transfer huge amount of money overnight for 5 years but at the hefty price of 15% ( bonds ), lower price are negociable as soon as people offer common stock ( prefered shares ) with favorable caracteristics ( the prefered dividend is much higher than the one received by normal shares and the exercice price is at a discount ). All the previously enounced deals show a combination of these two tools.The Berkshire-Dow Chemical deal shows how Buffett structures deals in order to never loose moneyIn 2009 Dow needed capital to finance the acquisition of Rohm & Haas and entered into an agreement with Berkshire. WB provided a loan of $3 billion apparently without any time limit yielding annually 8.5%, the only "exit" possible is the conversion into shares around $42.5 per unit provided the share has been greater than $53,72 for 20 days over a period of 30 days.Such a setup is a “special Buffett”, it is only he who can obtain such a loan structure, a normal investor sometimes has access to such tools, such as in european market the ORA (bond repayable in shares), OCEANES (convertible bonds or exchangeable into new or existing shares) or ABSAs (shares with detachable BSAs, warrants ) but in all cases the bonds have a fixed amortization date and the warrants lose any value exceeded on a certain date. This peremption date can kill a good idea.With such terms, Buffett has the security of a bondholder which is that in case of bankruptcy bondholders passes before the shareholders, and a guaranteed income of 8.5% until the action recovers some colors.It is worth noting that converting to $42 provided that the share exceeds $53.7 for awhile secures a 30% margin.“Income taxes, principally deferred” are north of 82b$ as the last quaterly report showsAn example is the Duracell deal Buffett's Berkshire Hathaway buys P&G's DuracellThis is why Warren buys thinks about pre tax earning.In the sequence from 7:00 to 12:00 there are some numbers, he says that he bought shares of IBM at 180$/share and that five or six years ago he thought IBM would earn more than 20b$ pre tax, that means a pre tax earning/cap of 11,1%To summarize, Buffett is able to enjoy huge resource which cost is actually negative and he lends it at the cost of 15%, the spread and the taxation optimization explains the 20% returnThis split the Buffett Magic into smaller magicsto provide as much as possible float at the lowest cost, this is the magic operated by a bunch of professionals that Buffett assembled ( Ajit Jain in the Re business - National Indemnity and Gen Re-, Tom Nicely at Geico and now Peter J. Eastwood at Specialty Insurance )to deploy capital at the best cost and this is the main work of Warren, his partner Charlie and the two deputies Combs and Weschlerto develop enterprises in industrial sectors where capital can be reinvested wisely, this is what does Matthew K. Rose at BNSF, Mark Donegan at Precision Castparts, Gregory E. Abel at BH Energyto rely on external competences to do the dirty work of restructuring, he once praised Sandy Weill as “ creating huge value for his shareholders “ and now he invests big on Georges Lehman cost cutting skillsBut Warren started as an individual investor and it is quite tricky to participate to deals at favorable terms and with limitated risksSo the idea is to make deals where you are able to enforce your point of view but if you can’t, rely on external competences.Buffett once relied heavily on Sandy Weill who was running the show in the financial industry, he relied also on the management of Coca Cola, Gillette, Wells FargoNow he is partnering with Lemann’s 3GIf you have been smart enough to understand the genius of Steve Jobs, Bill Gates, you can understand the genius of Jeff Bezos, Elon Musk and you can understand why Google became Alphabet. All these give opportunities to sit on giant’s shoulders.This is what Buffett does as well.