Warren Buffett was born in Omaha , Nebraska . At an early age Buffett was known to have an extremely good sense of the business world. As a youngster, he read every book on business, the stock market, and economics, in the whole Omaha public library. At age 11, he began working at his father’s brokerage firm where he was able to have for the first time in his life direct access to financial markets. That year, he bought his first stock. He bought Cities Services for roughly 38 dollars a share. The stock moved upwards about 5% and he sold for a quick profit. At that time, Buffett learned his first real lesson in the stock market which was to hold onto a company until it reached its intrinsic value and later in life would adopt the strategy to buy and never sell which he frequently employs today. This has been commonly now referred to as the “Buy and Hold” method.
Buffett originally got into the University of Pennsylvania but later transferred to the University of Nebraska . There he discovered a book called the Intelligent Investor written by his future mentor Benjamin Graham. Ben Graham was an extremely conservative investor buying companies below their liquidation values. The way Graham came up with liquidation value was to find the net current asset value (current assets minus total liabilities minus preferred stock). If a company traded for 66% or less of net current asset value, Graham would buy the stock. This qualitative method works very well with small sums of money (1 million or less typically), and this is the strategy Buffett employed in his early investment partnership.
The other investor who had a major influence on Buffett was Phil Fisher, author of Common Stocks and Uncommon Profits. Fisher preached, unlike Graham, buying quality companies at good prices rather than poorly run businesses at very cheap prices. This for the most part is the strategy Buffett employs today as he tends to hold some of the greatest companies in the world in Berkshire Hathaway’s portfolio.
Buffett’s original purchase of Berkshire Hathaway was in 1962. Berkshire was originally a textile mill. He bought the stock with Ben Graham’s strategy in mind; he bought the stock below liquidation value. Unfortunately for Buffett, even with all his efforts to turn the company around, equity in the company would keep decreasing until the original Berkshire Hathaway was worth almost nothing. Luckily for Buffett he had taken the cash that the textile mill was making and investing it in other businesses, most notably insurance companies, Buffett turned a textile company with declining economics into the most notable holding company in the world.
So what stocks does Berkshire Hathaway currently own? As of the time of this writing Berkshire Hathaway’s top ten positions are Coca-Cola (KO), American Express (AXP), Wells Fargo (WFC), Procter & Gamble, Moody’s Corp, Johnson & Johnson (JNJ), Burlington North Santa Fe Corp (BNI), Wesco Financial Corp. (WSC) Financial, Anheuser-Busch (BUD), and the Washington Post (WPO).
Coca-Cola (KO): 16.69%
In 1988 Warren Buffett started buying stock in the Coca-Cola (KO) company, eventually around 7% of the company. Today the company trades at 23x earnings and 7x book value. While this may sound expensive, it really is pretty intrinsically priced. Coca-Cola (KO) is a very high return on capital business meaning that it is an asset light business producing loads of cash. Coca-Cola (KO) has what Buffett would call an economic moat or a barrier to entry. Essentially, nobody can compete with Coca-Cola (KO) making it a rock solid business. The great thing about Coca-Cola (KO) is that it is still a growth business. As the population grows, more people drink coke. Therefore every year there are more coke drinkers. This is why it is so easy for Coca-Cola (KO) to grow their equity. It’s also the reason that Coca-Cola (KO) trades at such a high multiple to its book value. In conclusion, if you purchased Coca-Cola (KO) stock today you would in the long run do better than the stock market as it has a very maintainable high return on equity.
American Express (AXP): 14.87%
In 1964, Warren Buffett started acquiring shares of American Express (AXP). Due to a massive scandal, the company incurred a large one time loss which caused panic selling of American Express (AXP) stock. While the world was doubtful of American Express (AXP)’ prospects to survive, Buffett thought the contrary. To test his thesis, Buffett stood behind the counter of a restaurant and observed people using American Express (AXP) cards. Therefore he knew the company would survive as it’s main product, credit cards, were still being used. American Express (AXP)’ business is very easy to understand. Before credit cards they sold traveler’s checks. Now the largest part of their business is the credit card business. Credit card members pay a fee to be an American Express (AXP) customer. American Express (AXP) also takes a tiny cut of every transaction used with their card. American Express (AXP) is also a very maintainable high return on capital business. The more people in the world, the more people are using credit cards. American Express (AXP) essentially does nothing and makes money doing it. They are a money tree and will be a sound buy and hold investment for years to come. It is interesting to note that the guru Joel Greenblatt also has a position in the company.
Wells Fargo (WFC): 13.91%
In 2000, Berkshire Hathaway disclosed a stake in Wells Fargo (WFC). In 2005 he acquired more shares as many bank stocks including Wells Fargo (WFC) were out of favor and trading on the cheap side. Today Wells Fargo (WFC) is trading at its 5 year average p/e ratio of 14 and price to book ratio of 2.5. Investing in Wells Fargo (WFC) will probably do alright in the long run as the bank is run by some great management. Either way, it’s not screaming cheap, and it is probably intrinsically priced. Buffett increased his position by 50% in late in 2005 at a price of 28 dollars to 30 dollars a share. The current price today is roughly 35 dollars a share.
Procter & Gamble (PG): 10.98%
In 2005, Buffett was left holding Procter & Gamble shares when Procter & Gamble acquired Gilette (Buffett’s original holding) for 57 billion dollars. Proctor & Gamble (PG) sells everything from soap to random accessories. They are trading below their 5 year average price to book and price to earnings ratios but in the long run it won’t make much of a difference. Proctor & Gamble (PG) is a best of breed consumer staples business which will not be going away anytime soon. You will not lose money investing in Proctor & Gamble (PG) in the long run. It would make a sound investment for a buy and hold fund as well as an IRA.
Moody’s Corp (MCO): 5.18%
Moody’s Corp (MCO) is probably my favorite business in Berkshire's portfolio. Proctor & Gamble (PG) is in the bond rating business. It’s very simple, easy to understand, best of breed, and has pre tax returns on capital of over 100%. This is one heck of a business. It’s best to look at this business as a money tree as it is extremely capital unintensive. At the moment it currently trades in line with it’s historic ratios but that might not be the case for long. They have some lawsuits playing out right now because Moody’s Corp (MCO) misgraded some bond issues. This could cause a temporary dip in the stock price, just as American Express (AXP) had one many years ago. Any bad news for Moody’s Corp (MCO) is good for investors as they can load up on shares. As for Warren Buffett, he originally disclosed his stake in 2002 yet hasn’t touched his shares recently.
Johnson & Johsnon (JNJ): 5.1%
In 2002, Warren Buffett disclosed his stake in Johnson & Johnson (JNJ). Johnson & Johnson (JNJ) is a pharmaceutical company in a sector that is totally unloved by general wall st. While 17x earnings and 12x cash flow isn’t a steal by any measure it is still relatively cheap for this company. For a company with high margins and a steady increase in net income, it is probably a good buy for any large-cap value portfolio managers. This is also a stable company with a proven track record, which should do pretty well for the years to come. In 2006, Buffett added 24 million shares to his original 2 million position at a price of 57.70 – 61.86. In 2007 he practically doubled his position at a price of around 60 dollars a share to about 67 dollars a share. He now owns 48.6 million shares. The current price is approximately 62 dollars a share.
Burlington North Santa Fe Corp (BNI): 4.85%
This year, Buffett disclosed a stake in the railroad company Burlington North Santa Fe Corp (BNI). The company unlike Buffett’s other holdings is extremely capital intensive. The industry for many years was a terrible industry to be in as the companies had no competitive advantage and the poor economics in the highly regulated industry made it tough to survive. Recently, with some regulatory laws being changed as well as high energy prices, railroad companies are at an advantage for the first time in over fifty years. Railroad companies can now carry freight more efficiently than trucking companies due to the high price of gasoline. This is very bad for trucking companies making it harder for them to stay in business. Therefore the railroad companies get more customers. Also, railcars have an average life of forty to fifty years. The last big boom was in the 1960’s meaning that the next 40 year cycle will be in the next few years. Burlington North Santa Fe Corp (BNI) with these economics and energy environment will make a very fine investment for the years to come. Buffett has even mentioned that with high energy prices railcars have a competitive advantage of over 4x that over trucking companies. In 2007 he has increased his shares from 34 million to 39 million shares. He bought his shares originally at 72 dollars to 83 dollars and then bought 5 million more shares the same year for 81.57. The current price today is around 87 dollars a share.
Wesco Financial Corp. (WSC): 4.56%
Warren Buffett’s partner, Charlie Munger, runs Wesco Financial Corp. (WSC) Financial. Wesco Financial Corp. (WSC) is essentially a mini Berkshire so to speak and has holdings in Coca-Cola (KO) as well as a few other companies. They also have a furniture rental, steel, and insurance subsidiary. This company is extremely well managed and Berkshire owns 80% of the company. There are rumors that if they ever trade at book value Berkshire will buy them out. At a premium to book value today the shares aren’t cheap nor expensive. Looking at this company quarter to quarter is meaningless as earnings are sporadic. But with great management this company will strive. Munger is also a genius at capital allocation and should do very well for shareholders in the long run. He has publicly stated he believes the company should not be worth more than book value.
Anheuser- Busch (BUD): 3.12%
Berkshire announced a stake in the company in 2005 as shown in their 2005 annual report. Anheuser-Busch (BUD) is the producer of Budweiser, which is America's best selling beer as well as the official beer sponsor of the Super bowl. The company has massive returns on equity and is the Coca-Cola (KO) of the beer industry. In September of 2006, Berkshire announced that they sold a portion of their Anheuser stake. At 20x earnings and 10x book value, the company is not cheap by any measure. I would choose many other companies before making an investment in the “King Of Beers”. Buffett originally bought shares at 44 dollars to 46 dollars. He reduced his shares by 4% 3 months later in September 2005 for 42 dollars – 45 dollars and then sold another 16% of his shares the same months for 44 dollars – 49 dollars. The current price today is 52 dollars a share.
The Washington Post (WPO): 2.29%
The Washington Post (WPO) was one of Berkshire's first core holdings. He originally bought into the company below liquidation value. While The Washington Post (WPO) is still a core holding of Berkshire's portfolio I would not buy a share. Buffett has publicly stated that at the time he bought the Post it was an impenetrable business. Now the internet has started to slowly kill the newspaper industry and Buffett believes that newspaper economics are in an everlasting decline.
Of course that’s not all the companies in Berkshire's portfolio. Some other interesting companies to look at our Conoco Phillips (COP) and Tyco (TYC) which are both sum of the parts plays. And then you have Union Pacific (UNP) and Norfolk Southern (NSC) which are two other railroads he owns. The most interesting holding in his portfolio has to be Comdisco Holdings (CDCO) which is a liquidation arbitrage play.