While it is rarely advisable to follow the investment decisions of others (because other investors have different opportunity cost calculations than you do, and they may understand a company in a way that you do not), there is understandable interest in the companies that Berkshire Hathaway [(NYSE:BRK.A) (NYSE:BRK.B)] adds to its common stock portfolio. Given Warren Buffett's long-term record of growing book value by about 20% annually, and given his reputation for long-term investment and "thinking like an owner," it is understandable why some investors might regard Mr. Buffett's investment decisions as fertile ground for further research.
The problem with that approach is this: the financial media often make the mistake of claiming that any transaction under the Berkshire umbrella is decided by Warren Buffett. With Todd Combs and Ted Weschler each controlling $5 billion portfolios to make decisions at their own discretion, we cannot assume that any move made by Berkshire can be associated with Buffett.
At the most recent Berkshire Hathaway shareholder meeting, Buffett offered these two insights into the Berkshire decision making process:
(1) If you see a move that involves five, six, or seven billion dollars, it is Buffett making the decision.
(2) And if you see a move in the hundreds of millions, it is likely Combs or Weschler making the decision. At the meeting, Buffett indicated that he does not monitor or comment on their decisions, and he gives them free rein (although Buffett instructed them not to buy Microsoft (NASDAQ:MSFT) due to his close relationship with Bill Gates, and to refrain from purchasing American Express (NYSE:AXP) for regulatory reasons).
Despite this, many sources in the financial media will claim that Warren Buffett is the one making the decisions when each quarterly filing comes out. Check out what Forbes had to say in response to Berkshire's latest quarterly filing that came out this week:
New Purchase: Chicago Bridge & Iron Company (NYSE:CBI).
Warren Buffett initiated holdings in Chicago Bridge & Iron Company. His purchase prices were between $46.35 and $62.1, with an estimated average price of $52.76. The impact to his portfolio due to this purchase was 0.48%. His holdings were 6,508,600 shares as of 03/31/2013.
Sold: General Dynamics (NYSE:GD).
Warren Buffett sold out his holdings in General Dynamics. His sale prices were between $64.57 and $71.86, with an estimated average price of $68.79.
Sold: Archer Daniels Midland (NYSE:ADM).
Warren Buffett sold out his holdings in Archer-Daniels Midland Company. His sale prices were between $27.39 and $33.73, with an estimated average price of $30.7.
Added: Wells Fargo (NYSE:WFC).
Warren Buffett added to his holdings in Wells Fargo & Co by 4.16%. His purchase prices were between $34.18 and $38.2, with an estimated average price of $35.63. The impact to his portfolio due to this purchase was 0.79%. His holdings were 458,170,323 shares as of 03/31/2013.
When we look at the Chicago Bridge & Iron company, we can see that Berkshire now owns 6.5 million shares. The stock trades a little over $60 per share. We are talking about an investment worth roughly $400 million. Considering that Weschler and Combs each control $5 billion or so, we are talking about 8% of the portfolio they manage. It certainly seems plausible that one of them made this investment. At the very least, we cannot say with any kind of certainty that it is a "Buffett investment."
If you look to Warren Buffett for idea, that is something that you will always have to keep in mind. When Berkshire releases its quarterly filings, most media outlets assume that any common stock portfolio selection reveals the work of Buffett's hand. That is not the case, especially with positions that total a few hundred million dollars.
Even then, it may not be wise to follow Buffett because they may not reflect prices at which Buffett would initiate a purchase in the company. He has not added to his Coca-Cola position in decades (you'd have to go back to the early 1990s), and the American Express stock generally gets treated as a long-term hold.
If you want to copy Buffett, Wells Fargo and IBM are probably your best bets. Buffett added a small amount to the company's IBM holdings in the first quarter, bringing the total to 68 million shares, or about $14 billion. That represents about 17% of the Berkshire common stock portfolio.
Buffett increased his Wells Fargo holdings by 4.6%, and Berkshire now owns 458 million shares. At $39.90 per share, that means that Berkshire owns over $18 billion worth of Wells Fargo. That's about 20% of Berkshire's common stock portfolio (by the way, Wells Fargo has passed Coca-Cola as Berkshire's largest common stock holding).
The big picture lesson is that you should ignore Berkshire's purchases in the hundreds of millions, unless you are interested in the decisions of Weschler and Combs (monitoring their behavior could be a worthwhile move since they likely represent the future of Berkshire). Most media outlets will report that Buffett is doing the buying, but there is no rational basis to believe that is the case. If you want to follow Buffett, you should keep your eyes trained on Wells Fargo. That is Buffett's largest common stock holding, and it is a company that he has been buying recently. When it comes to following Buffett, that is about as straightforward as it gets.