Warren Buffett's Portfolio Held the Best Among All Gurus for the Third Quarter

The third-quarter market environment proved too tortuous for even the most proficient money managers to come out ahead. But if money cannot be made, the second priority of an investor is to not lose any. GuruFocus tracked our gurus’ portfolios for the quarter ended September 30 and ranked them by the percentage they changed from the quarter ended June 30. The list assumes that the portfolios were static, and it only measures stock performance, not cash or bond holdings. In a quarter marked by a European sovereign debt crisis, historic U.S. debt downgrade, and economic uncertainty at home and abroad that sent the S&P500 down 14.3%, a look at the portfolios suggests which gurus and stocks best withstood the heat.


Warren Buffett, founder and CEO of the mega-conglomerate Berkshire Hathaway, again proved his unmatched investing prowess. His portfolio down 7.65%, he beat the S&P by 6.65 points, as well as all of the investors GuruFocus tracks.


Buffett prevailed by sticking to large, entrenched companies with substantial earnings power. Coca-Cola (KO, Financial), his largest holding, was essentially flat for the quarter, but “Time is the friend of the wonderful business,” Buffett said regarding Coke in his 2010 investor letter. The company reported record revenue in 2010 of $35 billion, record net income of $11.8 billion, and record free cash flow of $7.5 billion. Buffett has commented that people never tire of cola, unlike other products, no matter the status of the economy. Out of his other top-five holdings, two, Procter & Gamble (PG, Financial) and Kraft (KFT, Financial) were also essentially flat, and two, Wells Fargo (WFC, Financial) and American Express (AXP, Financial) were down.


Eddie Lampert’s ESL Investments was the best-performing hedge fund manager and fourth-best performing fund, down 9.8%. He benefitted from his major AutoZone (AZO, Financial) holding. Lampert owns 8,551,111 shares of the company, which went up 8%. The company’s earnings per share jumped 26.9% year over year, exceeding estimates. His other top holdings, mainly retail, were hit significantly.


Chuck Akre was the best-performing among mutual funds and second to Warren Buffett on the total list. Donald Yacktman’s proclivity for large-cap, high-quality companies bolstered his mutual fund portfolio and earned him sixth on GuruFocus’ list, down 11.35%. His largest holding, News Corp. (NWSA), was off less than 50 cents. Other mainstays remained relatively flat or down slightly and offset losses elsewhere, including second-largest holding PepsiCo (PEP, Financial), third-largest Procter & Gamble, fourth-largest Microsoft (MSFT, Financial) and fifth-largest Coca-Cola (KO). USA Today reports that of 8,179 U.S. Diversified stock funds, the average return was 1.3%, but was 6.3% for large-cap growth mutual funds.


Bill Gates’ portfolio in general fared well and better than the S&P, down 10.74%. The Bill & Melinda Gates Foundation Trust’s top holdings were Berkshire Hathaway (BRK.B), Caterpillar Inc. (CAT, Financial), and McDonalds Corp. (MCD).


Other closely followed gurus found themselves in less glamorous condition that previously. John Paulson, for instance, lost 19.17% mainly due to a misplaced (or early) bet on financials. Beleaguered Bank of America, now his twelfth largest holding after relieving his fund of 60,444,779 shares in the second quarter, fell 44%. News it would split into two companies and a sudden CEO switch sent his ninth-largest holding, HewlettPackard (HPQ) down 36%. Paulson told the Wall Street Journal on September 19, "Many investors make the mistake of buying high and selling low while the exact opposite is the right strategy." His prescient call on gold helped save his portfolio from deeper losses. He bought 31,500,000 shares of SPDR Gold Trust (GLD, Financial) in the first quarter of 2009 at $895.60 a share, before its historic run to highs near $1,900 a share.


Bruce Berkowitz dug a deep hole for his Fairholme Fund by amassing financials. His portfolio fell 27.72%, placing him eighth from the bottom of GuruFocus’ list. His top holdings include financial-crisis casualties AIG (AIG), Citigroup Inc. (C) and Bank of America. As recently as Sept. 19, 2011, Berkowitz told WealthTrack he was sticking with financials because, “The negatives are all uncertainty about the future, and what I try to do is focus on the facts of today. When you look at the income statements, they’re making huge cash flows. A lot of is being paid for the foolishness of 2007 and 2008, which will eventually burn off and those huge cash flows will begin to show. If you look at the balance sheets of the company, banks for example, they have the strongest balance sheets they’ve had probably in their histories,” among other reasons.


Ted Weschler, whom Buffett just selected for the second of three portfolio managers for Berkshire Hathaway, was down 23.75%. His largest holding of his extremely concentrated portfolio, DirecTV (DTV), fell 17%. He bought 7 million shares in the first quarter 2011 at an average price of $44, and added 3 million more in the second quarter at an average price of $48.19. DirecTV has a strong balance sheet with record-high revenue of $24.1 billion in 2010, and earnings that more than doubled to $2.2 billion from 2009. Long term the stock price followed growth, rising 106% over the last five years. His other top holdings from various sectors of the economy, W.R. Grace & Co. (GRA), DaVita Inc. (DVA), Valassis Communications Inc. (CCOI) fell significantly.


The guru coming it at 101, Richard Blum, founder of Blum Capital Partners, was down 36.97%. According to the fund’s investing philosophy, "As a value-oriented investor, the firm looks to take advantage of out-of-favor or neglected situations that offer highly compelling entry valuations. By sourcing our ideas primarily from the public markets, we are able to take advantage of temporary dislocations in the price of equity securities which are often due to market over-reactions or excessive focus on short-term phenomena. Our philosophy is to exercise patience and discipline in waiting for such opportunities to present themselves."


Blum’s portfolio is heavy on for-profit education services, which have suffered. Career Education Corp, (CECO), his second-largest holding, was down 39%. Third-largest holding ITT Educational Services Inc. (ESI) fell 26%. A wave of people enrolled in for-profit colleges to increase their chances of finding a job during the recession, but the industry suffered from recent criticism that students have difficulty finding jobs after graduation and had to scale back its aggressive recruitment tactics. Enrollment has since fallen across the board.


Here is the complete list:


i - Investment company; m - Mutual fund company; h - Hedge fund company