Berkshire Hathaway’s Portfolio Changes for Q2 2009 8 comments
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Berkshire Hathaway (BRK.A) just posted its 13-F filing with the SEC, which lists changes in its stock positions.
Buffett initiated a new position in medical technology company Becton Dickinson (BDX) in the second quarter. The sec filing shows Berkshire Hathaway purchased.1.20 million shares in Becton Dickinson. Becton Dickinson is a dividend aristocrat, which has raised distributions for 36 years in a row.
Berkshire added 4.4 million shares to its position in health care giant Johnson & Johnson (JNJ). This is the second consecutive addition to its holdings there. Johnson and Johnson (JNJ) is another dividend aristocrat, which has rewarded shareholders with 47 years of consecutive dividend increases. Check my analysis of the stock.
Those recent moves by Buffett reiterate my convictions that he is a closet dividend investor. Most companies that have managed to increase their dividends for long periods of time are ones that have wide moats as well as excellent competitive advantages in the marketplace. Having these qualities leads to rising earnings which tend to support a steady pace of increase in dividends.
Berkshire eliminated its position in utility company Constellation Energy (CEG). This wasn’t a surprising move since Buffett’s company had already disclosed this sale in a June 1 filing.
Berkshire Hathaway disclosed lowered stakes in Carmax (KMX), ConocoPhillips (COP), Eaton Corporation (ETN), Home Depot (HD), United Health Group (UNH) when comparing June 30 to March 31 filings.
In a July 22 filing Berkshire Disclosed it had also cut its stake in the credit rating company Moody’s (MCO) by 16%.
Over the past several months Berkshire Hathaway has been allocating funds to preferred stocks with at very good prices. The company has invested billions in preferred shares of companies like Goldman Sachs (GS), General Electric (GE), Tiffany’s (TIF), Harley Davidson (HOG) and Dow Chemical (DOW). Some of these deals deliver not only solid yields in the low double digits, but also give warrants which could provide solid capital gains if these stocks recover over the next few years.
What this filing does not show however is the fact that Buffett’s conglomerate “goofed on derivatives”. While there may be more buzz than actual news and the SEC issues have been resolved, it is interesting how Buffett talks one thing but then does exactly the opposite of what he preaches. He’s always held a view against derivatives, yet his company has always engaged in options selling, futures and insurance derivatives.
One of his riskiest trades is the selling of puts on four major world stock indices, which expire somewhere between 2018 and 2028. Berkshire assumed over $37.50 billion in potential liabilities in the process, and has already lost $8 billion on them at the end June 2009. If world stock markets resemble the Japanese stock market of the second “lost decade” for the country with the rising sun, then Berkshire would be on the hook for almost half the $37 billion in assumed liabilities.
Does is pay to follow Buffett’s moves? The answer is yes it does. According to this paper a portfolio that mimicked Buffet’s stock investments would have outperformed S&P 500 by 14.6% annually between 1976 and 2006. Here’s a list of Berkshire Hathaway’s portfolio holdings as of June 30, 2009:
Disclosure: Long JNJ
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Although book value for Berkshire went down 9+% in 2008, it has already gone up 4.3% in 2009. As for Buffett being a closet dividend investor, what he is, is a great asset allocator that looks for mispriced opportunities in his favor.
His comments about derivatives had to do with companies taking on severe derivative exposure, well above their net worth's, and not disclosing. His current derivative exposure is both limited to less than his cash on hand [by any reasonable valuation] and was disclosed to his shareholders [like me].
Does this tell us anything.
Thankyou
Instead of carelessly parroting cliches about categories of transactions, investors should parse the details of specific transactions to determine their values.
Instead of carelessly parroting cliches about categories of transactions, investors should parse the details of specific transactions to determine their values.
If you are going to invest in anything financial you can't go wrong following Buffet.
You make a valid point that Berkshire would most probably make money on the options contracts either if markets recover to their 2007 year-end levels or if he keeps reinvesting them in sweet prefered stock plays yielding 10%-15%.
The problem of course is that he has always claimed that he doesn't know what the direction of the market is, and yet his selling of "naked puts" is just about that - a directional trade that in 10-20 years stock markets would be above certain levels.
In addition to that I am concerned that he entered into these contracts at the end of 2007, when stock prices were close to their highest for the decade. If you had sold puts expiring in 2009 on the Nikkei in 1989, when it was close to 40.000, you would be on the hook for severe losses when those puts expire. While this might not happen and some investors might thing this is an outlier, people should still have this in mind. Nikkei is trading at 10597 currently.
Berkshire has received premiums of $4.5 billion for selling options and doesn't have to put any margin whatsoever - only its word that in 15-20 years it would honor those contracts. I guess if Berkshire had sold these contracts at the end of 2008 vs 2007 they would have received a higher premium amount ( since they didnt sell the puts at the top).
Anyway, if Berkshire manages to generate 10% and compound it annually, the $4.5 billion would be $30.2 billion by the end of 2027, so at the end of the day this trade could turn out well for Buffett's charities, even if stock markets went to zero ;-)
On Aug 16 09:15 AM Dave Shafer wrote:
> Usually you write cogent articles. This one is a stinker. You might
> want to look at Berkshire's derivatives a little closer. The $37B
> liability is if all the worlds indexes go to 0. That means, the worlds
> largest companies are all trading for nothing. If there is no growth
> for the next 10-20 years [The Japanese example], then the liability
> is $8B, about a third of his current cash on hand. But you forget
> he got cash for this insurance [these derivatives are basically insurance
> policy sold]. So he has the 10-20 years to invest the up front cash.
> Any money he makes is subtracted from the $8B liability. Considering
> last years investments into Goldman, GE, BYD, etc. are all paying
> off handsomely it is likely he has already made significant $$$ off
> of the derivatives sold.
>
> Although book value for Berkshire went down 9+% in 2008, it has already
> gone up 4.3% in 2009. As for Buffett being a closet dividend investor,
> what he is, is a great asset allocator that looks for mispriced opportunities
> in his favor.
>
> His comments about derivatives had to do with companies taking on
> severe derivative exposure, well above their net worth's, and not
> disclosing. His current derivative exposure is both limited to less
> than his cash on hand [by any reasonable valuation] and was disclosed
> to his shareholders [like me].
Buffett claims he doesn't know the direction of markets "in the short term." He is on record saying the long run market direction is up. Some how I don't think even Buffett could create a 10% annual return when the stock indexes are going to 0!
When the Nikkei peaked the average P/E ratio was over 80. The peak of 2008 the average P/E was in the low 20s. Quite a difference! If I [or anyone else] thought the long term [10-20 year] market outlook was a drop of 50-75% then we would be insane to invest in that market even for dividends!
Even though this post was not overly useful, keep up the good posts on dividend producing stocks. I appreciate them!
if
(A) the managers of Berkshire have seen or evaluated the fundamental flaws described by Reggie Middleton in his past few months of research on Wells Fargo Bank AND/OR
if
(B) the management of Wells Fargo bank have had an opportunity to refute or at least address the comments which Reggie provides in his bearish forecast of Wells fargo bank.
Perhaps professional hedge fund buy side analysts and investment firm sell side research analysts might ask the WFC management about their views about such observations
seekingalpha.com/artic...
Much to my regret, I was "unable" to take Reggie seriously after I retired from Bear Stearns in winter of 2006.
Reggie was among the first who initially identified a number of "macro" problems with the fundamentals of Bear Stearns as company as well as the management.
I had a bunch of "restricted shares" I could not sell (when it was in the 160 level) as well as some options and shares in my deferred comp plan which still (August 2009) have not been issued to me. But he did persuade me to at least hedge with covered calls and long puts. I still lost a mid 6 figure portion of my retirement budget but the hedge only helped me on a relative basis.
Thus, after a few years of continuing to follow him, I believe that his research should be considered as "value added" by those who are serious long term value investors.