Should You Follow Warren Buffett’s Latest Moves?

Berkshire Hathaway (BRK.A) published a glimpse of its stock portfolio holdings as of December 31,2008, on the SEC website. I have highlighted the largest changes in shares owned.


In the last quarter of 2008 Warren Buffett kept adding to his Burlington Northern (BNI) position by purchasing well over 6 million shares for Berkshire’s account. He also added to his positions in Ingersoll-Rand (IR), NRG Energy (NRG), and Eaton (ETN). He initiated positions in Constellation Energy Group (CEG) using his Midamerican subsidiary and in Nalco (NLC).

Buffett was not only buying American however. He was selling as well. Berkshire cut its stake in Johnson & Johnson (JNJ) by half to 28 million shares. Other notable decreases included Procter & Gamble (PG), US Bancorp (USB), Conoco-Phillips (COP) and Carmax (KMX). Berkshire also disposed of all of its Anheuser-Busch stock, which was tendered at $70/share after the merger with InBev. The holdings in other financial stocks such as Wells Fargo (WFC), American Express (AXP), Moody's (MCO) and Bank of America (BAC) were mainly unchanged for the quarter.

The value of Berkshire’s portfolio dropped to $51.87 billion from $69.89 billion at the end of third quarter 2008. Even the Oracle of Omaha is not immune to market corrections, especially now that his asset base is so huge. Berkshire Hathaway shares dropped by 26% in the last quarter of 2008, compared with a 21.5% drop for the broad S&P 500 index. So far this year both S&P 500 and Berkshire Hathaway stock are down between 12.20% and 13% each respectively.

Given the changes in Berkshire Hathaway’s portfolio, I would not recommend acting similarly in your personal investments, based solely on following Buffett’s moves. One reason why he might be selling solid dividend stocks such as Johnson & Johnson and Procter and Gamble could be that they haven’t fallen as much as the broader market, which makes them ideal for Buffett to deploy the funds in other beaten down sectors. Another reason could be that he needs to raise as much cash as possible, in order to participate in other preferred stock or fixed income deals, where he could earn a 10%-15% annual dividend yield, with very favorable terms for his company. Ordinary investors do not however have the purchasing power to participate in such favorable deals at this time. His list of fixed income or preferred stock investments range from Goldman Sachs (GS), General Electric (GE), USG, Swiss Re, Harley Davidson (HOG) and Tiffany’s (TIF).

As a dividend growth investor, I still consider Procter & Gamble and Johnson & Johnson one of the essential holdings in my dividend stock portfolio. Warren Buffett is not always right when it comes to selling. He did sell his stake at McDonald's (MCD) in 1998. In his 1998 Letter to Shareholders he mentioned that "In particular, my decision to sell McDonald's was a very big mistake.Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours."

Disclosure: Author is long GE, JNJ, PG, MCD

Comments

[Daniel Eskin:]

I really that the point you made was legit - Buffett could be selling to buy other stocks, rather than selling to get out of the market. There's been some criticism on other websites (i.e. www.thestreet.com/stor...) about Buffett selling American while preaching for everybody to buy American, so this is a great explanation for it. Well written.

Feb 18 11:25 AM

[tshk1221:]

The Oracle must be more interested in lending than stock investing these days since cowardly banks are cutting down on lending when lending has to be more and more aggressive. What can banks do? They just burnt all their capital into ashes when the collateral real estate was the hottest in US history.

Feb 18 03:35 PM

[Michael Zhuang:]

Why make things more complicated than necessary? Why not just buy BRK.A or BRK.B?

Feb 19 06:01 AM

[Hedged In:]

This is good attempt to rationalize Warren Buffett's moves -- thank you.

But look again at this:
"One reason why he might be selling solid dividend stocks such as Johnson & Johnson and Procter and Gamble could be that they haven’t fallen as much as the broader market, which makes them ideal for Buffett to deploy the funds in other beaten down sectors."

If Buffett sees greater value in other sectors, then shouldn't other investors too?

Feb 19 06:53 AM

[SALTAWAY:]

I would point out that the average investor that follows and mimics Buffet's picks has not done well over the last 20 years or so. Because of the time lag between his moves and public knowledge, you are doomed to underperform him. I agree with Michael above. I wouldnt copy him, I would let him run my money by buying brk.a or brk.b

Feb 19 08:31 AM

[optionsgirl:]

Buffett will be just fine. Do you think you could get the warrants and guaranteed interest payments he negotiated with GE? Not a chance. However, he still over-paid for plenty of his stock holdings. GE being a good example. Berkshire A Shares are about half of where they were at the height of the bull market. His short term results are even worse than the S & P. A small investor would be bankrupted quickly following his picks.

Feb 19 08:53 AM

[Emerald:]

The obvious point is Buffett is putting his money in high yield debt investments, not stocks.

Feb 19 10:35 AM

[Jason Rines...:]

Just a guess as to WB's thinking on J&J and Proctor and Gamble. These companies are mixed Consumer Healthcare products and have greater exposure to consumers pulling spending back then say, a straight Pharmaceutical company selling essential Rx treatments. The writing is on the wall, we are in depression.

Feb 19 04:11 PM

[ebenezer:]

I wonder if the man was on top of things enought to have sold and rebought some shares at lower prices, thus keeping the cash differential and maintaining his positions?

Feb 20 12:54 AM

[citydesk:]

Can anyone tell me what Mr. Buffet is buying/investing in across the pond in Europe? I saw a news article headline about it recently.

I am thinking that if the U.S.dollar falls more, he may be setting up to use another currency?

Feb 20 09:22 PM

[Dividend Gr...:]

Michael,

Of course you could always buy BRKa/b and not need to do any research. Of course i enjoy trying to decipher what made Buffett decide to rebalance his portfolio.

Furthermore i see a major risk in BRKa/b that Buffett's investment objectives might not be the same as yours. Also in Buffett "retires" from BRKa you will be left with stock in the company, but the Buffett premium will soon evaporate and the stock will fall.. The end result is that you would have learned a valuable lesson - always do your own homework,


On Feb 19 06:01 AM Michael Zhuang wrote:

> Why make things more complicated than necessary? Why not just buy
> BRK.A or BRK.B?

Feb 24 03:34 AM

[Dividend Gr...:]

Hedged in,

Another reason could be that he needs to raise as much cash as possible, in order to participate in other preferred stock or fixed income deals, where he could earn a 10%-15% annual dividend yield, with very favorable terms for his company. Ordinary investors do not however have the purchasing power to participate in such favorable deals at this time.


On Feb 19 06:53 AM Hedged In wrote:

> This is good attempt to rationalize Warren Buffett's moves -- thank
> you.
>
> But look again at this:
> "One reason why he might be selling solid dividend stocks such as
> Johnson & Johnson and Procter and Gamble could be that they haven’t
> fallen as much as the broader market, which makes them ideal for
> Buffett to deploy the funds in other beaten down sectors."
>
> If Buffett sees greater value in other sectors, then shouldn't other
> investors too?

Feb 24 03:35 AM

[Dividend Gr...:]

Saltaway,

Actually the opposite is true - investors who mimicked Buffett's portfolio would have outperformed the markets over the past 30 years:

papers.ssrn.com/sol3/p...


On Feb 19 08:31 AM SALTAWAY wrote:

> I would point out that the average investor that follows and mimics
> Buffet's picks has not done well over the last 20 years or so. Because
> of the time lag between his moves and public knowledge, you are doomed
> to underperform him. I agree with Michael above. I wouldnt copy him,
> I would let him run my money by buying brk.a or brk.b

Feb 24 03:36 AM

[Dividend Gr...:]

Jason,

Most of JNJ and PG's products are things people use on a daily basis. Even a great depression shouldn't hit these companies too hard.

City Desk,

Buffett took a 3 billion francs in convertible preferred shares in Swiss Re that pay an annual interest rate of 12% and will be convertible into common stock after three years at a price of 25 francs a share, subject to anti-dilution adjustments.
If the entire investment of 3 billion francs were converted into shares, Buffett could end up holding more than a fifth of Swiss Re


On Feb 19 04:11 PM Jason C. Rines wrote:

> Just a guess as to WB's thinking on J&J and Proctor and Gamble.
> These companies are mixed Consumer Healthcare products and have greater
> exposure to consumers pulling spending back then say, a straight
> Pharmaceutical company selling essential Rx treatments. The writing
> is on the wall, we are in depression.

Feb 24 03:42 AM

[FUJIMO:]

There enlies the misunderstanding of the Great Depression.
For those who have never lived in that time frame it is hard to understand the hardships of every day life.
The little emenitys that we take for granted would then have been a luxury. Every company would have to restructure and make conseccions.


On Feb 24 03:42 AM Dividend Growth Investor wrote:

> Jason,
>
> Most of JNJ and PG's products are things people use on a daily basis.
> Even a great depression shouldn't hit these companies too hard.
>
>
> City Desk,
>
> Buffett took a 3 billion francs in convertible preferred shares in
> Swiss Re that pay an annual interest rate of 12% and will be convertible
> into common stock after three years at a price of 25 francs a share,
> subject to anti-dilution adjustments.
> If the entire investment of 3 billion francs were converted into
> shares, Buffett could end up holding more than a fifth of Swiss Re
>

Feb 24 08:44 PM