What do Home Depot, Anheuser Busch, and Carmax have in common? Here’s a hint: Bank of America, American Express, and General Electric have the same thing in common. The answer is they are all investments by a “mutual fund” that does not charge you a load fee or annual expenses. You’ve no doubt heard of index funds that charge 0.15% or so a year in expenses. Well how does 0.00% sound? If you like free in your mutual fund, forget Vanguard or Fidelity. Instead, think Berkshire Hathaway.
Stocks owned by Berkshire Hathaway
On Friday Berkshire Hathaway filed what is called a Form 13F-HR with the Securities and Exchange Commission. This document lists the shares that Berkshire Hathaway owns in publicly traded companies. As an institutional investment manager, Berkshire is required to disclose its holdings, which allows us to get a peak at Warren Buffett’s investment decisions.
All in, Berkshire disclosed about $75 billion in investments, give or take a billion or two. So here’s the list of companies Berkshire has invested in, which should give you an idea why I view Berkshire more as a mutual fund than a more typical publicly traded company:
- American Express Co.
Anheuser Busch Cos.
Bank of America Corp.
Burlington Northern Santa Fe
Comdisco Holding Co.
Costco Wholesale Corp.
General Electric Co.
Home Depot Inc.
Iron Mountain Inc.
Johnson & Johnson
Kraft Foods Inc.
Lowes Companies Inc.
M & T Bank Corporation
NRG Energy, Inc.
Norfolk Southern Corp.
Procter & Gamble Co.
Sun Trusts Banks Inc.
Union Pacific Corp.
United Parcel Service Inc.
United Health Group Inc.
Wabco Holdings Inc.
Wal-Mart Stores, Inc.
Washington Post Co.
Wells Fargo & Co.
Wesco Finl Corp.
So what’s the most amazing thing about the above list of investments? It’s so short! Imagine having $75 billion to invest and putting it all in fewer than 30 companies. Gulp!
Now one could take a look at this list and think they’ll just invest in the same companies to mirror the performance of Warren Buffett. The results would be, shall we say unfortunate, for several reasons.
First, Berkshire does not invest just in public companies. In fact, some of its best investments have been in privately held entities, particularly in the insurance industry. Geico is perhaps the best known example of a private company that Berkshire purchased lock, stock and barrel. The flexibility to by in whole or in part private companies is one of the reasons I prefer Berkshire over large cap domestic mutual funds. Unlike mutual funds, Berkshire is not limited to investing in public companies.
Second, what made (or will make) the above investments so profitable turns on how much Buffett paid for the shares. In other words, it is not just what you invest in that counts, but also when you make your investment. Timing is everything, and Buffett’s timing is generally impeccable.
Third, Buffett can get deals you and I never could. The terms he received in his recent investment in General Electric preferred stock comes only when you have $5 billion or so to investment. Call it a volume discount.
Even Buffett and Berkshire Can Lose Money
As bullish as I am on Buffett and Berkshire, they are not immune from less than rosy results. Last week Berkshire filed its quarterly financial statements for the period ending September 30, 2008. Public companies must file quarterly reports with the SEC on Form 10-Q. They file annual reports on Form 10-K and what all called current reports on Form 8-K. Anyway, in the 10-Q, Berkshire reported quarterly net income of $1.06 billion.
While a billion dollars in net income for one quarter doesn’t sound so bad, in the same quarter last year the company reported $4.55 billion in net income. A decline in net income of more than 76% is less than stellar. The declining income was due to insurance related declines and investment losses (more about these losses in a minute). In other words, not even Berkshire is immune from market declines.
After the release of the 10-Q, I had a chance to discuss the results with Warren Buffett (no I didn’t). He told me that if investors where unhappy, they can sell their stock (no he didn’t). In fact, he’d buy it from them (he probably would, be he didn’t tell me that). But if I had called Mr. Buffett, and if he had taken my call, he would have said the following:
- Great blog, Dough, I read it everyday (What? It could happen).
- Investors should get use to single digit returns for the foreseeable future.
- Quarterly results generally are nothing but noise that should be ignored.
- We’ve been lucky the last few years with relatively few major catastrophic insurance losses.
Don’t expect the luck to last.
Now that hasn’t stopped some from dumping their Berkshire shares. CalPERS, the California Public Employees’ Retirement System, recently sold its stake in Berkshire Hathaway along with other investments, such as Bank of America. But CalPERS has found itself in a fine mess. It had capital calls from hedge fund investments that cost it a small fortune. And it has mounting losses from speculative real estate investments. So much for the experts.
Berkshire Mutual Fund
So let’s get back to Berkshire. I’ve started investing money each month in Berkshire. My plan is to have Berkshire stock replace my large cap mutual fund investments in my taxable account (not 401(k) or IRA accounts). There are no loads to pay. I purchase the stock through Sharebuilder, which costs just $4 a trade. And there are no annual expense ratios to deal with. Management in Omaha does take away from net income, but as a percentage of invested capital, the cost is minuscule.
As you can see from the list of investments above, which does not include the privately held companies at Berkshire, the company is well diversified. If I have any concern, it is its heavy investment in insurance. Buffett just loves the insurance model. He collects premiums today that won’t result in payouts for years, and can invest the money during the interim. I take some comfort in the rock solid balance sheet at Berkshire, and Buffett’s history of investing success.
And as the market goes down, including the price of Berkshire, I take comfort in the fact that my monthly investment is buying more and more of Berkshire Hathaway.
Berkshire Hathaway plunges more than 12% in one day
If you think the above heading is fictional, check out what Berkshire’s share price did yesterday. It was not pretty. The A share is now down to $84,000 from a previous high of over $151,000! Yesterday’s plunge was due to (are you ready for this?) investor fear resulting from the fact that Berkshire credit default swaps were trading at 415 basis points, up from 140 two months ago. Huh? In English, that means that the cost to ensure $10 million in Berkshire debt from default skyrocketed to from $140,000 to $450,000. Why?
Well, the simple and honest answer is I have no idea. News reports blame bets that Buffett made through derivatives on four share markets around the world, bets that even if he lost would not require a payout until 2019. But as markets decline, some view a loss from these derivatives as more likely, even if the finish line is 11 years away. Here’s how a Bloomberg article described these contracts:
Berkshire shareholders including Mohnish Pabrai, head of Pabrai Investment Funds, have said investors are concerned about losses on the company’s $37 billion bet on world equity values more than a decade from now. Buffett sold contracts to undisclosed counterparties for $4.85 billion protecting the buyers against declines in four stock indexes including the S&P 500.
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.
The fact is that Berkshire is down 41% this year; the S&P 500 is down 45%. So am I selling Berkshire? Nope. I buy a little more each month, just like I invest a little more in various mutual funds in my 401k. But I sure hope Buffett knows what he’s doing.