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Rupert Hargreaves
Rupert Hargreaves
Articles (687)  | Author's Website |

What Does Buffett's Portfolio Tell Us About the Direction Berkshire Is Taking?

Consumer goods companies are out, financials are in

I have spent much time over the past week looking at the current portfolio of Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) for various reasons.

One thing that has struck me about the portfolio, and its current state today, is how much it has changed over the past few decades. Not only has the portfolio grown in size, but it has also expanded into different industries and sectors, which are arguably outside Buffett's circle of competence -- or at least they would have been a decade ago.

Portfolio changes

I think the most significant change has probably been the shift away from consumer goods companies such as Coca-Cola (NYSE:KO) and Kraft Heinz (NASDAQ:KHC) (both of these companies still feature in the top 10 holdings) towards financial stocks and technology. Only a few quarters ago, the very idea that Buffett would be buying Apple (NASDAQ:AAPL) to include it in his portfolio would have been seen as outrageous. Today, however, Apple accounts for around a third of Berkshire Hathaway's public equity portfolio.

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The second biggest holding in the Berkshire Hathaway public equity portfolio today is Bank of America (BAC). This is another position many Buffett watchers would have thought impossible only a decade ago. Indeed, Buffett bought his first shares in the bank in the second quarter of 2007, although the most significant increase in the position came at the end of 2017 when the Oracle of Omaha exercised the warrants Berkshire extended to the bank in the depth of the financial crisis to help it remains solvent.

Wells Fargo (NYSE:WFC) is the third-largest position in the Berkshire Hathaway public equity portfolio. Buffett has roughly double the number of shares his conglomerate owns in this banking giant over the past decade.

Buffett's changing views?

All of the above got me thinking, if Buffett was to build his portfolio from scratch today, would he be buying companies like Coca-Cola, Kraft Heinz, Duracell, Wrigley's and Gillette (i.e., consumer goods giants) or would he stay away from the sector altogether?

Before I continue, I want to make it clear that this is nothing more than speculation and a bit of fun and analysis. I am not professing to have any unique insight into the way Buffett operates; I am just a casual observer with some thoughts on the way his portfolio has changed over the past decade.

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I think it is interesting that Buffett has moved into financials in a big way because this is an industry that has few barriers to entry. Realistically, anyone can start a bank if they have enough money. It is a highly commoditized industry with fixed profit margins set by interest rates, which companies themselves have very little control over. The one advantage financial companies like Bank of America and Wells Fargo have is very similar to the one that GEICO and General Reinsurance benefit from, and that is size. Yes, anyone can start up a financial company virtually overnight, but they cannot dominate the country in the way these two financial giants do.

Size has always been a critical component of Buffett's moat equation, but it hasn't been the only component. Brand loyalty is another factor that is usually put before size. But here's the thing, brand loyalty is no longer what it once was. Companies like Coca-Cola and Kraft Heinz are having to fight hard to maintain their market share. Consumers have so much choice nowadays that brands do not have the same kind of pricing power as they did 10 or 20 years ago.

This is a crucial consideration in the way Buffett has shifted his portfolio over the past decade. The stickiness of top consumer brands is no longer as sticky as it once was.

On the other hand, consumers are much less likely to change their bank (even though there are plenty of options out there), and banks don't have to spend a fortune to try to develop new products that appeal to changing consumer tastes. A mortgage is always going to be roughly the same product no matter where you look.

With this being the case, it makes sense that Buffett would shift his portfolio away from consumer goods towards financials.

As I said, this is only speculation, but I think it is an interesting perspective nonetheless.

Disclosure: The author owns shares in Berkshire Hathaway.

Read more here: 

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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