Warren Buffett

Notes from the 2010 Berkshire Hathaway Annual Report

February 27, 2011

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Warren Buffett’s annual Letter to Shareholders is always worth reading even if you didn’t own any shares in Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Here are some of the highlights from 2010 letter to shareholders released over the weekend and available on the Berkshire Hathaway website:

  • Conventional wisdom has it that America’s best days are behind it and economic might is going to inevitably shift eastward. Buffett, however, is optimistic about America’s prospects. He says that the country’s best days lie ahead because America’s system for unleashing the human potential is the same it has been in the past. (Pages 3-4).
  • If you invest is stocks, you have to have confidence that management will invest retained earnings sensibly. Buffett points out that a dollar of earnings in the hands of Sears Roebuck’s CEO had a far different story than a dollar entrusted with Sam Walton. (Pages 7-8).
  • Next, Buffett explains the business results in Insurance (Pages 8-11), Berkshire’s vast empire selling everything from candies to underwear (Pages 12-14), Railroads and utilities (Pages 14-15) and stock holdings. (Pages 17-18).
  • Buffett warns investors against putting too much stock in net earnings, which can be gamed by management. Instead, he counsels investors to pay close attention to changes in book value and a company’s operating earnings. (Pages 20-21).
  • Buffett counsels investors to eschew leverage, which can magnify gains but can turn lethal to a portfolio. Instead, he explains why despite very low interest rates investors Berkshire keeps plenty of cash around just in case things go horribly wrong as they did in September 2008. If there is only one thing you can read in this year’s letter, it should be Pages 22 to 25.

Quotes

On Leverage: “And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”

On reaching for yield: “We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.””

On availability of credit: “Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.”

On market volatility: “As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth – and I still have my wife.””

On homeownership: “But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

Buffett’s Bet against Hedge Funds

May 2, 2010

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A recent Fortune magazine article provided an update on Warren Buffett’s $1 million bet with Protégé Partners, a fund of hedge funds money manager that over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on the basis net of fees, costs and expenses. Buffett is trailing at the end of two years as his pick, the Vanguard S&P 500 Index Fund (Admiral Shares), is down 20.2% compared to -11.8% for Protégé’s picks.

Buffett and Protégé made their bet on Long Bets (as an aside, the Long Bets website has all sorts of fascinating bets ranging from computers continuing to fail the Turing test to where extra-terrestrial life forms will be discovered), which offers an arena for making long-term bets as a way of fostering long-term thinking. The details of the bet are available here. Both bettors contributed $320,000, which was used to purchase a strip bond that will be worth $1 million at the conclusion of the bet. The winner’s charity will receive the entire proceeds of the bet.

Buffett may be trailing but he likes the low-cost index fund’s chances:

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

For their part, Protégé Partners are putting faith in their hedge fund picking capabilities even though they have a very high fee hurdle to overcome. For starters Protégé charges investors a 1% annual management fee and 5% of any gains made by its hedge fund picks. The hedge funds themselves charge another 1.5% annual fee and 20% of any profits. The Vanguard S&P 500 Index fund, on the other hand, charges just 0.07%.

A Peek into Warren Buffett’s Personal Portfolio

April 5, 2010

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It is widely known that the bulk of Warren Buffett’s substantial wealth is concentrated in Berkshire Hathaway (BRK.A, BRK.B) stock. But it isn’t, perhaps, as well known that Mr. Buffett derives the bulk of his income, not from his $100,000 salary from Berkshire but from dividend payments from his personal stock holdings. A recent article on Morningstar took a look at Mr. Buffett’s personal holdings through information gleaned from filings with the SEC. Here are some highlights:

  1. Buffett’s portfolio is valued at $1.86 billion and the portfolio has an annual yield of $42.58 million.
  2. The portfolio has just 10 stocks and the top holding — Wells Fargo (WFC) — makes up nearly a quarter of the portfolio.
  3. More than half the portfolio is held in four Dow Jones component stocks: Johnson & Johnson (JNJ), Procter & Gamble (PG), Kraft Foods (KFT) and Wal-Mart (WMT). In fact, two more stocks (Exxon Mobil and GE) in the portfolio are Dow Components.
  4. The Morningstar article points out that every single business in Buffett’s portfolio has been around for more than a century. The newest business would be UPS, which was founded as recently as 1907.

I went looking through SEC filings to figure out how Buffett’s portfolio holdings have changed over time. The furthest I could go was 2006 because prior to that Buffett’s holdings were either not reported or were combined with reporting from other related entities. The following table lists the holdings (number of shares) of Buffett’s personal portfolio as of December 31st for the period 2006-09:

Warren Buffett's Personal Portfolio

Some interesting points:

  1. 2009 was a busy year for Buffett. He increased his holdings in Wells Fargo significantly, added Wal-Mart and Exxon Mobil and sold Constellation Energy.
  2. Other major holdings are also recent additions. US Bancorp, Procter & Gamble and Kraft Foods were purchased in 2007.
  3. Overall, the portfolio has very low turnover. Other than Constellation Energy, which was purchased in 2008 and sold in 2009, Buffett adds stocks to the portfolio but rarely sells them.