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Rupert Hargreaves
Rupert Hargreaves
Articles (833)  | Author's Website |

Warren Buffett's Amazon Buy: Should You Follow Berkshire?

Does Berkshire's move mean it's time to buy Amazon?

May 07, 2019 | About:

Last weak, Warren Buffett (Trades, Portfolio) made an announcement on CNBC that caught the attention of Wall Street analysts, investors and media outlets around the world.

The Oracle of Omaha declared that Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) had acquired some shares in retail behemoth Amazon.com (NASDAQ:AMZN), and immediately after he made this statement, shares of the company jumped as investors rushed to buy into what appeared to be Buffett's new favorite company.

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Buffett on Amazon

This statement has caught the attention of investors around the world because it seems to suggest that Buffett has finally changed his view towards growing tech companies. But, this view really misses the point. In the interview, but it did not say that he himself had acquired the shares. His exact words were:

"One of the fellows in the office that manages money ... bought some Amazon."

He then went on to say that the position would appear when Berkshire files its 13F later this month. When he refers to "one of the fellows," Buffett is referring to Berkshire's money managers Todd Combs and Ted Weschler. Together, these two money managers look after around $25 billion in stock for the conglomerate, and while they have been given more money to play with in recent years, this is still a relatively small amount compared to the overall stock portfolio. Berkshire has approximately $200 billion of public stock investments.

Considering that Amazon itself is nearly a trillion-dollar company, double the size of Berkshire, this isn't a particularly significant development.

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In fact, it is somewhat of a footnote in the Berkshire story. Nevertheless, the decision to initiate a position in the online retail giant generated a lot of buzz at Berkshire's annual meeting last weekend, and shareholders wanted to know Buffett's reasoning for acquiring a stake. He didn't answer the question directly but did comment that valuing Amazon was fairly similar to valuing any bank stock.

"The people making the decision on Amazon are absolutely [as] much value investors as I was when I was looking around for all these things selling below working capital years ago. That has not changed...Considerations are identical when you buy Amazon versus some, say, bank stock that looks cheap statistically against book value."

Buffett also stated that before initiating the position his managers undoubtedly took into account all the appropriate financial metrics including the company's growth, tangible assets, excess cash and profit margins. "All those things go into making a calculation as to whether they should buy A versus B versus C and they are absolutely following the principal ... I don't second guess them," he said.

All of these comments point to the conclusion that this is not a typical Buffett investment, and investors should not consider it as such. Instead, it seems to be an excellent investment made by people who know how growth stocks work, i.e. Combs and Weschler. And the position is more of a starter, tracking position for Berkshire's portfolio than anything else.

It is also important to note that Amazon does not need a Buffett stamp of approval. In many respects, Jeff Bezos is a much better business manager than Buffett. He has built Amazon into one of the world's largest retailers from nothing, while Buffett has always relied upon acquiring well-managed, competitively positioned businesses. Both of these billionaires have different skill sets that have achieved fantastic returns for shareholders, and both companies give investors different benefits. Berkshire, for example, is a much more defensive business than Amazon.

The point I'm trying to make here is that just because someone at Berkshire bought some shares in Amazon does not mean that it is a good investment for your portfolio and neither does it mean that the managers at Berkshire are running out of ideas. The position is just one part of a much larger puzzle.

Disclosure: The author owns shares in Berkshire Hathaway.

Read more here: 

Berkshire's Buybacks: Back Up the Truck 

Warren Buffett's Due Diligence Process 

3 Things to Look Out For at Berkshire Hathaway's 2019 Annual Meeting 

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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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