“Is Warren Buffett relevant?” Mark Haines, co-anchor of CNBC’s “Squawk on the Street,” recently posed that question to me on air.
“He’s more relevant now than ever,” I answered. Taking a look at how Buffett invests personally shows why.
Did you know that Warren Buffett manages a personal portfolio separate from his nearly lifelong stock holdings in his conglomerate Berkshire Hathaway? The man many consider to be the world’s greatest investor has long declared that ninety-five percent of his and his family’s net worth is in Berkshire’s stock. Those holdings are well reported and analyzed. But what about his other investments, and what can we learn from that portfolio?
Buffett’s private portfolio represents less than five percent of his net worth, but that five percent is substantial by anyone’s measure—with a recent value of $1.8 billion. Certainly worth paying attention to.
This also answers the question often asked, “How does Warren Buffett live on a salary of $100,000 per year, with one of the lowest CEO compensation packages among the Fortune 500 companies?”
Each quarter the worldwide media reports—usually incorrectly, that the common stock changes submitted by Berkshire Hathaway are decisions made solely by its chairman, Warren Buffett. Many of the Berkshire buys and sells reported as Buffett’s are actually directed by Louis A. Simpson, CEO of Capital Operations at wholly owned auto insurer GEICO. By carefully reviewing the list of the twenty-one different reporting entities listed at the beginning of the report, one can figure out, in Column 7 of the filing, which investments belong to the parent company Berkshire Hathaway and its subsidiaries and should be reported as actions of Warren Buffett, which purchases and sales result from Simpson, and which investments are owned solely by Mr. Buffett. All three are hiding in plain sight.
Taking a closer look at the 13F-HR reports filed with the Securities and Exchange Commission (http://www.sec.gov) reveals more lessons about Buffett’s personal portfolio. These reports, which must be filed forty-five days after the end of each quarter by any U.S.-based institutional investor with $100 million or more under management, list the stocks that Buffett owns, not including fixed income or foreign investments. (Occasionally, for competitive reasons, Berkshire is given permission by the SEC to withhold and delay information about what it buys or sells for up to one year after the quarter end.)
Why should that quarterly report matter to you? Because it holds at least eight key lessons you can use to invest the way Buffett does.
#1 Do Your Own Research: Media reports can be misleading. Don’t believe everything you read or hear—not even from major news sources like Reuters, Forbes or CNBC, about what Buffett is buying or selling. At the end of 2009, the most recent filings indicate that a total of forty-seven different stocks are in Berkshire and related party portfolios. Ten stocks are owned by Buffett in his private portfolio (reporting entity #4), including two (GE and UPS) that are not in Berkshire or GEICO portfolios (reporting entities #9, #10 and #11). These stocks are identified by the #4 in Column 7 (Other Managers). Since Buffett owns 100 shares of most publicly traded companies, his #4 is listed next to all forty-five stocks. You can piece together his personal portfolio wherever you find the #4 listed alone.
Here is the list of the 21 reporting entities:
|NO. FILE # NAME|
|1. 28-5678 BH Life Insurance Co Nebraska|
|2. 28-10388 BH Columbia Inc.|
|3. 28-719 Blue Chip Stamps|
|4. 28-554 Buffett, Warren E.|
|5. 28-1517 Columbia Insurance Co.|
|6. 28-2226 Cornhusker Casualty Co.|
|7. 28-06102 Cypress Insurance Company|
|8. 28-11217 Fechheimer Brothers Company|
|9. 28- GEC Investment Managers|
|10. 28-852 GEICO Corp.|
|11. 28-101 Government Employees Ins. Corp.|
|12. 28- Medical Protective Corp.|
|13. 28-1066 National Fire & Marine|
|14. 28-718 National Indemnity Co.|
|15. 28-5006 National Liability & Fire Ins. Co.|
|16. 28-11222 Nebraska Furniture Mart|
|17. 28-717 OBH Inc.|
|18. 28- U.S. Investment Corp.|
|19. 28-1357 Wesco Financial Corp.|
|20. 28-3091 Wesco Financial Ins. Co.|
|21. 28-3105 Wesco Holdings Midwest, Inc.|
1. First visit http://www.berkshirehathaway.com
2. Next, click on Link to SEC Filings
3. Then click on the second entity (there are 4) listed or number 0001067983 just to the left of Berkshire Hathaway Inc.
4. On the left you will see a filings column: scroll down to the report listed as 13F-HR or 13F-HR/A (amended) and titled Quarterly Report Filed by Institutional Managers. Select the most recent quarter or, if you wish, a previous reporting period. Click on documents.
5. Finally, click on either red document number after ‘FORM 13F-HR/A’ v55243a1e13fvhrza.txt or ‘Complete submission text file’ 0000950123-10-013409.txt. The filing is self explanatory and easy to read. Remember, wherever you see the #4 in Column 7 it is a personal holding of Warren E. Buffett.
Study, and learn from, what you find there.
#2 Consider Old School Investments with Little Change: The average company in Buffett’s personal portfolio was started in 1892, some four decades before he was born. Maybe it’s simply coincidence but the average founding date of the ten stocks he holds is the same as his company’s largest common stock holding—none other than Coca Cola.
Like Buffett’s most recent purchase—Burlington Northern Santa Fe, founded in 1850—the companies in his ten-stock fund have diversified very little from the industry sector where they first began. True to his public word, he is investing in America even with his personal holdings.
Knowing Buffett’s propensity for acquiring “old” companies, Abercrombie and Fitch, founded in the same year as his favorite daily beverage, would seem to be an odds-on favorite to be added to Buffett’s personal fund.
But, Buffett has no personal investing interest in fashion, technology, telecoms, computers, the Internet, bio-science, or other new-fangled, fast-changing business models. Instead of Initial Public Offerings (IPOs), his personal portfolio is loaded with OPOs—Old Public Offerings. Buffett should consider himself a financial anthropologist. The older things become, the more interested he is.
Chart I: Warren Buffett’s Personal Portfolio: Number of Shares:
|J & J||Health||1886||4,973,200||4,973,200||4,973,200||4,322,500|
|P & G||Consumer||1837||4,375,000||4,375,000||4,375,000||4,375,000|
#3 Be Decisive: Once you decide to purchase a stock or dispose of an investment, move quickly. Buy or sell with a fire hose, not an eyedropper. Buffett doesn’t move in or out of a stock slowly. He moves quickly. As he wrote in his most recent letter, “When its raining gold bring a bucket, not a thimble.” Many private investors as well as professional investment managers make the mistake of dabbling into a stock. If it goes up they stop buying it, hoping for the price to go back down. If it drops in price after their initial purchase, driven by behavioral psychology they wait for it to decline more before resuming their purchase. If you are buying slowly you are probably focused on price and don’t understand the value of what you are buying. Although he is very decisive, once Buffett admitted that he cost his shareholders billions of dollars when he started to purchase Walmart and stopped when the shares began to rise a quarter of one percent.
#4 Be an Owner, Not a Traitor: For Buffett, it’s not about trading or switching in and out of a stock due to the latest quarterly or emotionally charged media report. It’s about reading, thinking, and investing in a rational way at the right price or at a discount to the stock’s value. Notice the lack of trading activity in the previous Chart I.
In 2009, Buffett made four buys (green) and no sales (which would have been highlighted in red if there were any). He had no trading activity “at all” in the first and fourth quarters. He added to two existing positions (Johnson & Johnson and Wells Fargo) and started two new stocks (Walmart and Exxon).
Buffett buys century-old American companies (except for Ingersoll Rand, which is based in Ireland) with durable competitive advantages at a discount to their values—and then holds onto them. A combination of patriotism, investing in what and where you know, and long-standing and proven investment philosophy of holding long-term, waiting for the market to eventually price the stock based on earnings. In addition, most of the stocks in Buffett’s private portfolio are multi-nationals capturing as much as 40 percent of their earnings in markets and countries outside the USA.
Although it can be done, it is just not Buffett’s game to trade in and out of stocks. Besides, the tax impact of short-term capital gains can chew up a sizeable portion of your profits. It’s not only a lot of work to decide when to sell and what to buy next, but it adds to the degree of difficulty as well. It’s easier to be an owner.
#5 Go Big or Go Home: Holding a handful of stocks will do, if you know what you are doing. Concentration is for the know-something investor. Diversification along with dollar cost averaging, investing a set amount at regular intervals, is for the know-nothing investor.
“The average investor would be best served to buy a low-cost index fund,” Buffett says. Most of the “super investors” he’s known have made their vast fortunes by owning just a handful of stocks. Mimicking Berkshire’s holdings and showcasing his long-held investment philosophy, over seventy-five percent of his personal fund is invested in just five stocks. When Buffett finds something he likes, he loads up—for example, putting as much as twenty-one percent of his $1.8 billion personal investments into Wells Fargo.
Chart II: Buffett’s Personal Portfolio Value and Percentage (as of Dec 31, 2009)
|Johnson & Johnson||JNJ||$320,323,812||17%|
|Proctor & Gamble||PG||$265,256,250||14%|
This chart does not include his personal holdings of 350,000 Berkshire Hathaway Class A shares (valued at $99,200 each at the end of 2009, worth approximately $35 billion) or 75,013,134 Class B shares (valued at $65.79 each, worth an additional $5 billion). So, $2 billion of $40 billion, or approximately five percent of Buffett’s total net worth, is invested in his personal portfolio.
Chart III is the same data shown as a pie chart and represents the percentage of each stock owned, based on dollar value. While a total of ten stocks make up his entire $2 billion portfolio, more than half of Buffett’s personal holdings are in just three: Wells Fargo, Johnson & Johnson, and Proctor & Gamble. Include Kraft and Walmart and seventy-seven percent of his private portfolio could fit in one hand.
And get this: you can still buy Johnson & Johnson and Kraft stock for a lower price than Berkshire paid.
Chart III: Buffett’s Personal Portfolio Percentage:
#6 Large Names with Wide Moats: These are your grandfather’s and great-grandfather’s stocks. Most of the equities Buffett personally invests in are large, recognizable multi-national names representing basic and long-standing business categories like banks, health care, consumable goods, food, and retail. These are stocks with very wide moats, making it difficult to compete against them, and are, therefore, a favorite of Berkshire’s financier. As with his recent—and largest, acquisition of a railroad, Buffett continues to make an all-in wager on America with his private holdings. (It should be noted that investments made outside the U.S. are not required to be reported; those personal investments disclosed by Buffett in recent years have primarily been industrial stocks based in Korea and real estate investment trusts known as REITs.)
#7 Dividends for Income: While Buffett boasts he’s paid just $100,000 a year in salary, of which he pays back half to Berkshire to cover personal expenses such as postage and secretarial services, he does fly around in a Gulfstream jet—which he also pays for personally. So it begs the question: How does he live on his modest salary, without stock options and without ever selling a single share of Berkshire Hathaway?
The answer? Five percent of his wealth is invested outside of his conglomerate and generates a 2.3 percent yield—nearly $43 million in annual dividends. Chart IV shows how Buffett can earn a salary of $100,000 and still afford to pay another of his wholly owned subsidiaries, NetJets, for 300 annual hours’ use of a Gulfstream jet for himself and his family.
Chart IV: Warren Buffett’s 2009 Estimated Annual Dividend Income:
|Johnson & Johnson||$9,747,472|
|Proctor & Gamble||$7,700,000|
|Avg = 2.3%||$42,583,971|
#8 Think Independently: If you are a know-something investor, then you must think independently. A know-nothing investor, by definition, invests (usually a set amount over a regularly scheduled period) in a low-cost index fund and becomes the market. He or she doesn’t need to know anything. As the top 500 domestic stocks go up or down, so does the know-nothing investor. And by doing so, can beat ninety percent of the know-something professional money managers.
The dirty little secret in the professional investment management business is that many hedge fund managers—like those investing in Berkshire Hathaway, American Express, Wells Fargo, and Walmart—mimic Warren Buffett’s stock picks. For this privilege, their clients are charged two percent of their assets and another twenty percent of the realized profits. Buffett calls these professionals the “2 and 20 Club” or “helpers.” The irony is, these pros are not even thinking for themselves but are simply imitating what Buffett and others are doing with their investment portfolios.
So, should these pros be considered lazy? Not by a long shot. It means to them—and to me and many others, that Warren Buffett remains as relevant today as ever.
Clarification: The SEC in most cases does NOT require an investment manager to report personal holdings on the 13F quarterly filings. If that is the case then the reported personal holdings reported in this article may instead be the Berkshire Hathaway Pension Fund portfolio. While the method of obtaining the information on domestic equity holdings, the way to determine which stocks are selected by Buffett for his subsidiary companies from those selected by Lou Simpson of GEICO, the reported annual income of Berkshire’s chief along with all eight investment lessons are still valid.
Robert P. Miles is an author, international speaker, and founder of the 7th Annual Value Investor Conference scheduled for May 3 - 5, 2010 in Los Angeles. To learn more, visit http://www.valueinvestorconference.com