Berkshire Hathaway (NYSE:BRK.A) unadjusted stock investment returns were well below the market.
Berkshire Hathaway's common stock investments are listed on page 19 of Warren Buffett's annual letter to shareholders (see below). Fifteen stocks with the largest market values are listed with their year-end value and their cost. There is also a row called "Others", which are presumed to be stocks with much lower market values. This is not completely the case, as will be seen later. Buffett does not attempt to show any of the 15 stocks' returns for the year. His table only shows present value vs. their cost. The costs are from the date of original purchase, which in most cases is much longer than the prior yearend.
We reformulated the table to show the annual returns from 2015 yearend. The table below shows the 2016 returns made by each stock and their dividends. It gives the total return for that stock investment. The total return of the whole portfolio was determined by adding up all the individual stocks gains and dividends. This is known as a dollar weighted portfolio return.
Here is what we found. Our table shows that (1) the portfolio of 15 stocks plus "Others" produced capital gains of 7.3%; (2) if dividends received by the portfolio are included, the portfolio total return rises to 9.40% and (3) if the "Others" are excluded, the portfolio return climbs to 9.85%. The reason we exclude "Others" is because we don't know the prior yearend prices of each of these "Other" stocks, nor their exact dividends. More on this later.
Buffett's stock returns did not do as well as the S&P 500. Look at the table below.
This shows that the S&P Total Return Index was 12.0% in 2016, or 2.15% higher than Berkshire's common stock investments return (adjusted) of 9.85%. Interestingly, BRK.A's stock rose 23.4%, almost twice the market return. BRK.A's stocks are worth $122 billion, or 30% of the company's $409 billion in total assets. They also represent 43% of BRK.A's $286 billion in shareholder's equity. So investors in BRK.A must have be having a lot more enthusiasm for BRK.A's other assets, not its stock holdings. Otherwise why would the stock rise 23% when 43% of the underlying BRK.A book value only went up 9.85%? Or did the investors who drove up the stock 23% really know that the almost half of the company's book value went up less than 10%? In other words, did they really know they may have overpaid, since Buffett does not show the returns of 43% of the company's book value? More on this later.
Berkshire made 5 new common stock investments and completely sold out of 3 stocks, plus made incremental changes in 3 others.
BRKA gives the cost for stocks in the first column, but no information on the sales of stocks in the second column. We don't know the sale prices of these investments. We also don't know the prices of the minor additions and reductions of other stocks in the third column above. The only thing we know is the changes in the number of shares. These can be seen from Berkshire's quarterly 13F filings with the SEC. So we decided to not include the stocks sold during the year in column two. We did include the new stocks added in column one, since Berkshire lists the cost of these stocks. We adjusted the dividends received based on the number of shares held at quarter end (derived from the quarterly 13F filings).
What about Kraft Heinz?
Buffett wrote this in the section about Berkshire's common stock investments:
The Kraft Heinz Company (NASDAQ:KHC) was public for all of 2016. So no wonder Buffett wants us to add in this stock. Let's see how that affects the total returns of the portfolio.
BRK.A's holdings in KHC are very large ($28.418 billion), and the stock rose 20% during 2016, or $4.738 billion. In addition, dividends received added in $762 million. So the total return addition to the portfolio was $5.5 billion. This is a substantial contribution. For example, the total return of the portfolio without KHC was $10.652 billion (see the table above). Adding in KHC the total return becomes $16.192 billion. This is an increase of 52%! No wonder Buffett wants us to add in this stock.
But it turns out adding KHC doesn't help the portfolio total returns that much. Here's why. The denominator also goes up. The total return of $16.192 billion divided by the starting (12/31/15 year end) base of $137.444 billion (previously $113.765 billion) yields a return for 2016 of 11.78% for the portfolio. This is still below the S&P 500 total return of 12.00%.
Ok, what if we adjust the returns by taking out the "Others", as we did in the table above? This improves the returns. Now the total return of the portfolio is $15.082 billion on a lower base of $120.994 billion. That represents a portfolio total return of 12.46%. Finally. Now Buffett can say his stocks beat the S&P 500 return - only if we exclude the "Other" stocks. But just barely.
It turns out that the "Other" category, which is supposed to include stocks that are not in the "largest" market value category, actually has stocks that are quite large. This is not what Buffett said in the "Investments" section where he limited the list to 15 stocks with "at yearend the largest market value." The smallest market value in the list of 15 stocks in Buffett's table on page 19 is USG Corp (NYSE:USG), which at yearend, had a market value of $1.253 billion.
Buffett excluded several stocks with quite large holding values from the list of 15 stocks considered major investments by Berkshire (and put them in the "Other" category). We found this out by looking at the 13F filings which were filed with the SEC in February. For example, he decided to exclude Berkshire's holdings in DaVita, Inc. (NYSE:DVA), with a yearend market value of $1.189 billion, even though it was included in the 2015 list of largest investments. This is very close in market value to USG, the smallest holding in the list of major stock investments. Berkshire Hathaway did not sell any of those DVA shares during the year. But DVA's stock price fell 7.9% during the year. Including this large stock will hurt the overall portfolio returns for the year.
In addition, Buffett did not include BRK.A's holdings in General Motors (NYSE:GM) which were worth $1.16 billion at yearend. Again this is very close to the smallest stock in the list of major investments. GM's stock price rose only 2.4% during 2016. Berkshire held the stock the whole year. Including GM in the major stock holdings list will also reduce the overall BRK.A portfolio return. GM's return was below the average return of the rest of the portfolio. In fact, BRK.A reduced its investment in GM very slightly in Q4 2016.
Also, BRK.A bought shares in American Airlines (NASDAQ:AAL) during Q3 and Q4 2016 for a holding worth over $1.06 billion at yearend. This investment was also not included in the "large" holdings list, even though it is over $1 billion. We don't know the cost of this investment. BRK.A did list its new holdings in Delta Airlines (NYSE:DAL), worth over $2.7 billion and its new holding in Southwest Airlines (NYSE:LUV), both acquired starting in Q3 and Q4 2016 just like its purchases of AAL. DAL showed a gain of 17% over BRK.A's cost and LUV showed a gain of 22% over cost during the period in 2016 these stocks were acquired. But since we do not have the cost information for AAL we cannot include this stock's returns in the list of major investments.
That brings up the problem with including the "Other" stocks in the portfolio total return. Even though we know their original cost from the annual report, we can't accurately figure out the returns on those stocks for the year 2016. Some individual "Other" stock costs are before yearend 2015, so we could use the yearend 2015 price as a base, like with DaVita . But others like American Airlines were acquired during Q4 2016 and we don't know BRK.A's cost basis. So we can't figure out the base capital gains for these stocks without more information.
But we can include stocks, like DVA and GM where full year holding information is available. These stocks are legitimately "large", since they are close to the market value of USG. DVA had a total return of -$102 million (no dividends were paid) with no shares sold during the year, on a beginning year base of $1.291 billion. That represents a total return of -7.91% for 2016. GM had a reduction in value of -$27 million. But BRK.A sold a small amount of GM stock during Q4. GM's stock price rose 2.44% during the year. Let's grant that rise to the portfolio returns. This adds $29 million to the portfolio returns, and GM dividends received also add $53 million. So BRK.A's total return in GM was $82 million, on a beginning year base value worth $1.187 billion. This is a total return of 6.9% by adding GM total returns. Combined, these two stocks (DVA and GM) will add -$20 million in total returns on a 2015 yearend beginning base of $2.477 billion. The net return is -.8% if these two stocks are added to the list.
The bottom line is that by adding DVA and GM the BRK.A stock portfolio had a net total return of 12.2%, compared to the S&P 500 total return of 12.0%. This can be seen in the revised table below. This table shows that by adding in Kraft Heinz , DaVita and GM, Berkshire Hathaway's stock portfolio was marginally above the S&P 500 total return. But remember we gave one stock a higher return than it probably achieved. BRK.A sold off some of its holdings in GM in Q4, but we did not account for that. This means the total return of the portfolio is probably right at 12%, or even with the S&P 500.
Berkshire Hathaway (NYSE:BRK.A, BRK.B) listed 15 "larger" market cap stocks in its annual report. We added in a few others. The total return was either slightly below or slightly above the S&P 500, depending on which stocks are added to the original list. We added in stocks that were "large" and were held for the whole year but fell marginally below the value of the smallest stock in the original list. Doing this more or less dragged down the total returns. If we knew all the costs of the individual "Other" stocks, we would have added in those stocks. This could have significantly affected the portfolio returns.
Most importantly with the list of stock returns we do have BRKA did not significantly outperform the market. At best its return was marginally above or at par with the index on a total return basis. I believe most of the "Other" stocks not added in the original list probably outperformed the index. Why can't Buffett provide all the beginning costs of all the stocks added in his portfolio and the value of stock shares removed? That way the performance of the whole portfolio could be accurately calculated. Otherwise we are left surmising the performance of only a portion of the total portfolio. Alternatively, why couldn't Buffett provide the performance of the portfolio for the year, including all stocks? After all, he provides supplementary information on the subsidiaries and private company holdings in his annual letter to shareholders. Just do the same for the public holdings.
It is possible these "Other" stocks were not picked by Buffett himself, but rather by either Todd Combs and/or Ted Weschler. That would be nice to know, since then we could distinguish the performance of the stocks they picked compared to Buffett's picks.
As noted above 43% of the book value of Berkshire is tied up in common stocks. Since this is a large percentage precisely calculating the stock portfolio returns should be very important to Berkshire Hathaway shareholders. I suspect this percentage of the book value held by BRK.A in public stocks will decline over the next five to ten years. If this doesn't happen and if the stock portfolio performance continues as in 2016, Buffett or his eventual successor might want to index a good portion of these investments rather than picking individual stocks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.