When he buys a stock, he likes to say he intends to hold it forever. Unfortunately, that cannot always be the case, as even for the Oracle of Omaha, not all stock positions end up being the deals he thought they were.
This observation mainly applies to his small holdings. High-conviction positions worth over several billion dollars in value don't tend to change that much. However, positions further down the ranking tend to change hands often, from my observations. Some of this is due to the actions of his portfolio managers, who are responsible for trades of less than $1 billion based on Buffett's own comments.
According to Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) latest 10-K, the figures show that the conglomerate purchased $30.2 billion of equity securities on the consolidated statement of cash flows in the financial year ending Dec. 31, 2020. Meanwhile, it sold $38.8 billion of equity securities. Berkshire also acquired $208 billion of U.S. Treasury Bills and fixed maturity securities last year.
The same trend of buying and selling can be seen in the past three years. In 2019, Berkshire acquired $18.6 billion of equity securities and sold $14.4 billion In 2018, the group spent $43.2 billion buying equity securities and received $18.8 billion from sales. Based on these figures, we have a turnover rate averaging around 10% per year for Berkshire's portfolio.
Of course, this figure will not be accurate because there are many other factors to consider. Berkshire is constantly generating cash which it can invest, and this will impact the turnover ratio. This calculation is also only based on the value of the equity portfolio and does not consider the cash value or the group's other subsidiaries' value.
Based on the group's entire shareholder equity, turnover was around 6.5% for 2020. To put that into perspective, according to Morningstar, the average turnover ratio for managed domestic stock funds is 63%. This suggests Berkshire's turnover is around 90% less.
Berkshire's turnover is low, but we should be under no illusion that Buffett and his team only buy and never sell stocks. That's not true. In 2020, the billionaire investor's holding company sold $38 billion of equity securities.
If we look back at the trading activity, we can see Buffett's biggest sales included the sale of the major U.S. airline stocks in the second quarter as well as the sale of several financial services companies, including Wells Fargo (WFC, Financial). Buffett has since commented on most of these holdings, declaring them mistakes for the most part.
This highlights the fact that while Buffett does buy and sell tens of billions of dollars worth of stock every year, he's not an entirely passive portfolio manager either. In fact, he is willing to act quickly and decisively when the situation changes.
This is one of his best qualities, and it is something that should not be overlooked. The investor does stubbornly hold losing positions forever. Believing so may cause investors to make this mistake themselves.
Disclosure: The author owns no share mentioned.
Read more here:
- Warren Buffett Completed $50 Billion of Deals in 2020
- A Closer Look at Berkshire Hathaway's Insurance Losses in 2020
- Warren Buffett's Annual Letter: Buying Stocks and Buying Businesses
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