Tracking 10 Years Of Berkshire Hathaway's Investment Portfolio (Part 1)

| About: Berkshire Hathaway (BRK.A)

Berkshire Hathaway’s (NYSE:BRK.A) investment portfolio has quite a following as many consider it as the Holy Grail in investing. Part of the interest can be attributed to curiosity over what Berkshire Hathaway’s Warren Buffett is doing with the stocks in the portfolio. But there are countless investors trying to mimic Buffett’s actions in their own portfolio in an attempt to realize superior returns.

The information about portfolio changes is made available to the investment community through SEC 13F quarterly filings, a regulatory requirement. At the end of every quarter, Berkshire Hathaway duly files this form. As soon as these forms are available online, the media latches on to it and seeks to analyze the adjustments in the previous quarter in a fevered frenzy.

This analysis, mostly targeted towards casual investors usually compares the current report with the previous report. Such short-term comparative information has very limited value and can at times be downright misleading because of the following few factors:

  1. The portfolio rarely makes revolutionary changes from quarter to quarter. In the latest report (filed 08/15/2011 – data as of 06/30/ 2011), the dollar amount of the changes to the portfolio added up to $620 million. The amount is huge, but compared to the size of Berkshire Hathaway’s investment portfolio, it is only about 1.2% of the total value of $52.36 billion. The only new investment was in Dollar General (NYSE:DG) with a value of $50.76 million. Some in the media incorrectly evaluated this and ruled Buffett as bullish on Dollar General when in fact this stake is insignificant – less than 0.1% of his portfolio.
  2. Warren Buffett has the tendency of nibbling very small stakes only to dispose of them a few quarters later. Over the course of the last decade, the portfolio saw 84 different companies although the portfolio size has consistently remained in the 20s and 30s. This investment style has tripped many Buffett followers over the years as materially insignificant buys and sells does not necessarily imply Buffett to be bullish or bearish on a particular stock.
  3. Berkshire Hathaway uses 13F Confidential Treatment Requests to delay reporting of stakes as a significant stake is being built. This essentially reduces the possibility of profiting by front-running Berkshire’s future trades.

To unearth constructive information, here is a look at the data from the 13F filings in the last decade rather than the latest two quarters. The pie-charts below compare the portfolios with sector-wise allocations for the latest quarter (06/2011) compared to the one from ten years ago (12/2001):

click on images to enlarge

The portfolio grew by around 86% during these ten years from around $28.06 billion to $52.36 billion. While part of the growth is from an increase in the value of portfolio stocks, the rest is new money added. The bulk (85% and 90% respectively for 2001 and 2011) of the portfolio is concentrated in just two sectors:

  • Consumer staples and discretionary.
  • Financials.

As for changes, allocation to financials increased by 7% and that to energy (Oil Majors - Conoco Philips (NYSE:COP) and Exxon Mobil (NYSE:XOM)) improved by 3%. Also, the allotment to industrials decreased from around 4% to 1%. Over the last ten years, Warren Buffett has become progressively more bullish on financials, he not only maintained his large position in American Express (NYSE:AXP) but also increased his stake in Wells Fargo (NYSE:WFC) and built a significant position in US Bancorp (NYSE:USB).

Berkshire Hathaway’s investment portfolio is heavily concentrated around a few securities. It is of immense interest that each of the top six securities accounts to more than 5% of the total portfolio value individually and when combined rack up a whopping 81% of the total portfolio. The pie-charts below compare the portfolio’s Top-6 individual stocks for the latest quarter compared to the one from ten years ago (12/31/2001):

The similarity in percentage allocation between now and ten years ago is remarkable:

  • American Express (AXP) and Coca Cola (NYSE:KO) together account for 41% of the total portfolio value now compared to 54% ten years ago and the share count remained constant at 151.61 million and 200 million respectively. In the last ten years, both these stocks returned around 40% excluding dividends and the change in the allocation percentage is because the total portfolio value increased by 86%.
  • The most significant allocation change is in Wells Fargo (WFC) which more than doubled from 8% of the portfolio in 2001 to 19% of the portfolio in 2011. The share count increased by seven times (including the 2:1 stock split) as the stake was built up over the years. The share count almost tripled from around 112 million to 290 million between 2005 and 2007. The stake was increased by around 10% (290 million to 320 million) in 2009 during the financial meltdown.
  • The stake in Gillette was replaced with Procter & Gamble (NYSE:PG) shares following PG’s acquisition of Gillette in January 2005. Although the stake was increased from around 96 million shares to 100 million shares that year following Warren Buffett’s statement to that effect during the deal announcement, the stake later settled down at 76.8 million shares by 2010.
  • In 2006 and 2007, Berkshire Hathaway initiated significant stakes in Johnson & Johnson (NYSE:JNJ) and Kraft (KFT) respectively whose share count has fluctuated since then. Despite certain negative comments about Kraft’s Cadbury acquisition and some stock sales in the last few years, it is unlikely that Berkshire will turn bearish on either of these companies.
  • Wesco Financial (NYSEMKT:WSC) which had accounted for 6% of the portfolio in 2001 ceased to be a bet because the company became a subsidiary of Berkshire Hathaway in 2011.
  • Even though the share count increased slightly in the last ten years, the stake in Moody’s (NYSE:MCO), is less than 2% of the portfolio currently.

The overall stake in the consumer staples and discretionary sector has come down slightly from 54% to 52%, but given the significant new stake buildups, one can infer that Berkshire is bullish on that sector. Meanwhile the stakes in financials have gone up from 31% to 38% indicating a very bullish bias. It is reasonable to conclude Berkshire Hathaway is bullish on financials and consumer staples with the likelihood of increasing stakes in Wells Fargo and possibly Johnson & Johnson.

The next few top stocks in the portfolio are good candidates for potential stocks Berkshire Hathaway might actively be buying. The pie chart below shows the relative allocations of the next four top stocks in Berkshire Hathaway’s portfolio that make up about 14% of the total portfolio:

Berkshire Hathaway’s stake in Moody’s and ConocoPhillips have gone down over the last few years while that in Wal-Mart (NYSE:WMT) and US Bancorp have gone up. Again it is only rational to conclude from this pattern that Berkshire might be actively looking to buy more Wal-Mart and US Bancorp shares in its effort to build those stakes.

The rest of the seventeen stocks in the portfolio combine to make up only about 5% of the total portfolio. Also, Berkshire nibbled at 57 stocks in the last ten years that have since been sold out.

We will look into Berkshire Hathaway’s stock sales during the last ten years and the minnows in the current portfolio in future articles.

Disclosure: I am long USB, PG, KFT, WMT. I have written cash-covered puts on BRK.B (Jan 2012 75) and WFC (Apr 2012 22).

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