What Would Buffett Do? A Look at Berkshire's Long-Term Value Investments

by: Brian Burns

One thing that I look forward to every year is the annual letter to shareholders written by Warren Buffett of Berkshire Hathaway (BRK.A, BRK.B). The calming words and tone of Buffett help me to pause and seriously consider my investing choices and methodology. While some follow the acronym WWJD, I strive for WWBD (What Would Buffett Do).

There are no specific stock picks given (although after reading the letter you may have a strong desire to own Berkshire Hathaway stock), but there is an underlying tone about investing in a business based on intrinsic value and holding that investment for a long term.

So often the focus is on the day to day fluctuations of the market. That short term focus is preciously what Buffett has continually warned investors about. He states that [1]

Market price and intrinsic value often follow very different paths - sometimes for extended periods - but eventually they meet.....At Berkshire, our time horizon is forever.

What I took from this year's letter is that the market, while not always efficient, always creates investment opportunities. The key to finding these opportunities is focusing on the value of the company, not the fluctuations of the stock price [1]:

What students should be learning is how to value a business. That's what investing is all about.

Aside from sage advice about how to approach investing, are there any hidden gems that may shed some illumination about the future of the economy, stock market, and Buffett's plans for Berkshire? There are a few industries and areas that Buffett touched upon that I thought could be indicative of future moves. The topics included in his letter involve everything from railroads, housing, dividends, and even wind energy.

Riding the Rails

One of Buffett's highlights in 2010 was in the railroad industry with the acquisition of Burlington Northern Santa Fe. This deal closed around 2/12/10 and has been a boon to Berkshire ever since. Although it's too late to buy Burlington Northern (you can always buy Berkshire stock), there are many other names in the sector that are worth taking a look at. A few names are CSX Corp. (CSX), Union Pacific Corp. (UNP), and Norfolk Southern Corp. (NSC). Make no mistake about it, since the close of Buffett's BNSF acquisition, the rails have been chugging along. From February 12, 2010 to March 4, 2011 CSX stock is up 68%, UNP is up 51%, and NSC is up 35%. All stocks are currently trading above their prior ten year average price/book value and prior ten year average P/E.

Steel Elephants

Buffett mentions that, although the movement of goods should increase in the United States, BNSF is going to have to invest in itself in order to take full advantage of this growth. He states that [1]:

...We will regularly spend far more than our depreciation, with this excess amounting to $2 billion in 2011.

It's important to note that BNSF is going to most likely be improving their rail infrastructure, adding rails, ect. This may lead to more acquisitions in the space or in related fields. In fact, Buffett admits to having an "itchy" trigger finger and that future performance at Berkshire is dependent on "...good performance from our current businesses and more major acquisitions".

A related industry to railroads that should benefit is the steel industry. A few names worth taking a look into are Nucor Corp. (NUE), United States Steel Corp. (X), and Steel Dynamics Inc. (STLD). I am also interested in iron miner Cliff Natural Resources Inc. (CLF). These names should be large enough for the weapon of choice Buffett mentions in his letter, the elephant gun.

The Winds of Change?

Aside from investing in railroads, another large business owned by Berkshire is investing in wind energy. Buffett states that MidAmerican Energy will have 2,909 megawatts of wind generation by the end of 2011 [1] and that the total amount committed to wind is $5.4 billion.

There are a few small wind energy companies that I found that I'm not sure are worth mentioning. I would just say that the largest one that I recommend is General Electric (GE). Of course, GE does much more than wind and I think is a company well positioned for the future. After cutting its dividend in June 2009, the company has started to raise it in the past quarters. After being cut to $0.10 per share, the next dividend on the way (Payment date April 25, 2011) [2] is going to be $0.14 per share, a 40% increase.

Dividends, Please

And speaking of dividends, Buffett mentions that he is bullish on the dividend prospects of his current common stock holdings. In particular, he thinks the largest increase could come from Wells Fargo (WFC). The company's last dividend with a paid date of March 1, 2011 was listed at $0.05 per sharewhich comes out to an annual dividend of $0.20 or a yield of 0.60% [3].

Compare that with the good 'ole times of 2008 when the company handed out $1.30 during the year which came out to roughly a 4% yield (Using the stock price at the end of 2008). The dividend at WFC is around the same level as it was back in 1995 and it is being held down by the Fed's restrictions. Buffett is optimistic that these restrictions will soon be a thing of the past and states that, "...we would expect our annual dividend from just this one security to increase by several hundreds of millions of dollars annually" [1]. As of December 31, 2010 Berkshire owned 358,936,125 shares of WFC [1].

The other company mentioned as increasing their divided was The Coca-Cola Company (KO). As of 12/31/10 Berkshire owned 200,000,000 shares of KO [1]. Buffett estimates that in 2011 the company will receive $376 million from KO, an increase of 7% from the prior year.

The Need for Ammunition

Neatly tucked into one of the last few pages of his stockholder letter is a letter from Buffett's grandfather, Ernest. His grandfather stressed the importance of keeping a reserve. Buffett follows his grandfather's advice and states that Berkshire will usually keep $20 billion on hand in order to withstand unforeseen insurances losses and also to capitalize on buying opportunities.

The same should be true of your personal investment portfolios. We should all make it a point to keep $20 billion on hand in case we need it. Oh ya, we aren't Buffett are we? Anyway, the point is that there should be some sort of cushion for you to be able to withstand a drop in the market as well as be able to take advantage of that drop. If you were 100% invested in the market before the recent crash then you know how painful not having a reserve can be. Having the flexibility to invest when the market presents those opportunities to you can make all the difference in the returns you achieve over the course of your life.

Disclosures: I am long CSX. I receive no compensation to write about any specific stock, sector, or theme.


  1. Accessed from BerkshireHathaway.com on March 3, 2011 (here - pdf)
  2. Accessed from GE.com on March 5, 2011 (here)
  3. Accessed from WellsFargo.com on March 5, 2011 (here)

Disclosure: I am long CSX.