Tuesday, 6th April 2010

Learn from Warren Buffett’s personal portfolio

Written by George Traganidas Topics: Articles, Stock Investing

I read an article the other day by Robert Miles on the website of Morningstar that talked about the personal portfolio of Warren Buffett. That is the stocks that Warren has in his name and not under Berkshire Hathaway. I include here the major points from this article:

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 21 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 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 47 different stocks are in Berkshire and related party portfolios. Ten stocks are owned by Buffett in his private portfolio, including two (GE and UPS) that are not in Berkshire or GEICO portfolios.

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 10 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 10 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.

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.

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 Wal-Mart and stopped when the shares began to rise a quarter of 1%.

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.

In 2009, Buffett made four buys and no sales. 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 (Wal-Mart 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% of their earnings in markets and countries outside the U.S.

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, more than 75% 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 21% of his $1.8 billion personal investments into Wells Fargo.

While a total of 10 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 Wal-Mart and 77% of his private portfolio could fit in one hand.

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 multinational 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. Which is consistent with his public disclosure that his 2006 annual income was $46.9 million, according to Forbes.

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 90% 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 Wal-Mart – mimic Warren Buffett’s stock picks. For this privilege, their clients are charged 2% of their assets and another 20% 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.

Follow the practical way,
George

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