Why watch Warren Buffett’s stock portfolio?

Who is Warren Buffett?

Warren Buffett is an American businessman and famed investor known for his ‘value’ philosophy. Buffett advocates investing in companies that have a history of strong fundamentals, proven ability to generate profits, and clear potential for continued growth.

Buffett grew up in Omaha, Nebraska where he developed an early interest in business from his father, Howard Buffett, a noted businessman and state representative. Buffett attended the Wharton School at the University of Pennsylvania. He later transferred to the University of Nebraska to finish his undergraduate degree before receiving his master’s from Columbia Business School.

How did Warren Buffett get rich?

After graduating from Columbia, Buffett worked as an investment salesman for his family’s business, Buffett-Falk & Company. Catching the attention of his former Columbia professor, Benjamin Graham, Buffett was hired to work as a securities analyst for the Graham-Newman Corp. After saving up enough money Buffett started his own holding company, Buffett Partnership, Ltd. where he made his first million.

With that money, Buffett began acquiring shares of Berkshire Hathaway and eventually took full control of the textile company in 1965. After failing to prop up Berkshire’s crumbling textile business, Buffett turned his attention towards investing in insurance companies including National Indemnity Company and GEICO. 

This pivot was extremely successful for Buffett. Within 20 years Berkshire Hathaway’s stock hit $1000 per share in 1983. By then he had invested heavily in stocks like ABC Broadcasting and the Washington Post Company. By his own admission, Buffett claims he cost himself upwards of $200bn by not switching from textiles to insurance sooner.

As CEO of Berkshire Hathaway Buffett has generalized annual returns of 20.3% for shareholders since 1965. Currently, Warren Buffett’s estimated net worth is $105bn.

Why watch Warren Buffett’s stocks?

Investors watch Warren Buffett’s stocks to try and replicate his success. As mentioned, Warren Buffett’s Berkshire Hathaway portfolio has averaged 20% annual returns for the past 60 years. That’s double the 10% annualized return for the benchmark S&P 500.

According to a 2008 study done by Gerald Martin of American University’s Kogod School of Business and John Puthenpurackal of the University of Nevada, Las Vegas, Buffett’s results are possible to mimic.

Martin and Puthenpurackal found that if you were to copy Buffett’s investments from 1976 to 2006 every month after they were released publicly by Berkshire Hathaway via 13F, you would have also beaten the S&P 500 – by an average of 10.75% per year.

However, it’s impossible to directly copy Buffett’s portfolio. His capital power worth billions of dollars allows him to negotiate investment deals with companies that simply aren’t available to the rest of us.

For example, one of Buffett’s most profitable investments is with Bank of America. He negotiated directly with the then-struggling company in 2011 to procure a 6% dividend yield on his preferred stock. In the same deal, Buffett secured the right to buy 700 million more shares at $7.14 each at any point in the next ten years. Those are benefits unavailable to the average person.

In addition, there are many situations where cloning someone’s portfolio can go wrong. Even with access to Buffett’s 13F reports, you do not know at what price stocks were bought and when Buffett intends to sell.

Furthermore, you do not have the safety net Buffett and Berkshire Hathaway does. While Buffett’s strategy is relatively cautious, every investor loses. For example, Buffett bought Teva Pharmaceuticals as part of a larger buy-in of multiple pharmaceutical companies in 2020, yet the company’s price only slid further down, and Buffett completely exited his stake in Q4 of 2021.

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Warren Buffett’s investment strategy

Buffett’s investment strategy centres heavily around value investing – the idea that you should only invest in companies with strong fundamentals such as healthy earnings reports and clear paths to future growth.

Most importantly, it means avoiding companies you don’t understand or whose business practices are unclear. This is one reason Buffett avoided heavy losses during the dot-com bust of the early 2000s. Most of those tech companies were still new and unknown, so Buffett had largely avoided them up to that point.

What is the Buffett indicator?

Warren Buffett formulated an indicator to evaluate how expensive or cheap the stock market is averaging at any given time. The Buffett indicator is calculated as a ratio of market cap to GDP. Despite being a simple calculation, Buffett has stated he believes it is ‘probably the best single measure of where valuations stand at any given moment.

The indicator is basically a price-to-sale ratio at a national level, evaluating entire countries. A ratio of 100% is generally considered well-valued, and anything below 50% is undervalued.

Of course, this top-line revenue report can be misleading as it doesn’t account for actual profitability, and the growing number of Initial Public Offerings (IPOs) increases the ratio without changing anything from a valuation perspective. However, the indicator can provide a quick snapshot of a market’s health.

Warren Buffett’s portfolio 2022

Below are the top ten holdings of Berkshire Hathaway. You’ll notice most of the companies are established industry leaders, matching Buffett’s own value investing philosophy. 

Warren Buffett’s most recent buys and sells

It is impossible to replicate Buffett’s portfolio, but looking at Buffett’s and other famous investors’ recent portfolio moves can give you ideas on trades you may want to make. Maybe Buffett buys new stakes in an industry you previously avoided. It may be worth looking into those new stakes and trying to understand the value Buffett sees in that industry. Below are 9 of Buffett’s largest portfolio changes reported at the end of Q4 2021.

Visa

A bet on the international proliferation of digital transactions, Buffett’s two lieutenants Ted Weschler and Todd Combs are credited for originally taking a stake in both Visa and Mastercard, with Buffett admitting he wished it had been his own pick. However, Berkshire has cut its position in both (-7% for Mastercard) for the second quarter in a row.

Royalty Pharma

Buffett bought over 13m shares of Royalty Pharma in Q3, only to turn around and slash his holdings by over a third. Royalty Pharma focuses on acquiring biopharmaceutical royalties, providing capital to other companies for research and development and in exchange for profit, most notably in Abbvie’s Imbruvica, Biogen’s Tysabri and Pfizer’s Xtandi.

Bristol-Myers Squibb

Berkshire has sold shares of Bristol-Myers Squibb in every quarter of 2021, with this most recent sell off being the company’s largest cut.

AbbVie

Buffett first bought AbbVie, an American pharmaceutical company most known for Humira, in Q3 of 020. However, Berkshire has been cutting the position each quarter since. The initial buy was part of a wider bet on pharmaceuticals taken by Buffett.

Marsh McLennan

A leading professional services firm, Marsh McLennan is one of several insurance firms in Berkshire’s portfolio including GEICO and General Re. Buffett grew his stake in the firm in Q4 2020 and Q1 2021 but has since been cutting the stake each quarter since.

Teva Pharmaceutical

Another retreat from earlier bets across the pharmaceutical sector, Buffett bet on the stock in 2017 when share prices were down. Unfortunately, the bet never worked out and Teva’s stock is now down 75% over the past five years.

Sirius XM Holdings

While Buffett exited this stake, he’s still in on the leading satellite-radio company. The past few quarters have seen Berkshire add significantly to its Liberty Sirius XM Group, Series A holdings.

RH

This small add to Berkshire’s position comes after the home furnishing retailer formerly known as Restoration Hardware had seen success amid the pandemic as more workers spent more time at home. Buffett hasn’t said much publicly about this position, but the ramp-up aligns with his other bets on American economic growth. Berkshire Hathaway is currently the company’s third-largest stockholder.

Floor & Décor Holdings

After initiating a period in Q3 of 2021, Buffett added 3% to the stake, matching his outlook on other home retailers, including Berkshire Hathaway’s fully owned subsidiary Nebraska Furniture Mart.

Chevron

Following a 24% increase in Q3, Buffett now holds 38m shares in Chevron, which has delivered a total return of 58% in the past year due in part to climbing crude oil prices. Buffett has been hot and cold on the energy sector, fully exiting positions in companies like Phillips 66 and Suncor while only first buying into Chevron in Q4 2020.

Liberty Sirius XM Group, Series A

Buffett has been one of the tracking stock’s largest shareholders for years now, but a 35% increase here while fully exiting his position in Sirius XM’s common shares shows nothing major has changed in his approach to the satellite radio company other than his preference of involvement.

Formula One Group

Initiating a small stake in Q4, the company holding commercial rights for the Formula One world championship is a subsidiary of John Malone’s Liberty Media Corporation, making this yet another Berkshire holding tied to the billionaire businessman.

Activision Blizzard

The global game developer saw its stock plummet in 2021 amid allegations of sexual harassment and calls for CEO Bobby Kotick to step down. Buffett bought in at an estimate of $66.53 per share weeks before Microsoft agreed to pay $95 a share in cash for the troubled video game publisher. This means Buffett likely made a quick profit on his relatively small buy-in.

Nu Holdings

The Brazilian financial company went public late last year and became one of only two IPOs to be backed by Buffett, who has often publicly stated his disinterest in IPOs. The fintech company offers banking services to 48 million customers in Latin America, where counties like Brazil are known for banks that charge high fees with meagre customer service.