4 Stocks Warren Buffett Just Won’t Let Go
Fifteen years ago, in 1999, the U.S. stock market was in a frenzy. That year, investors dumped enough money into speculative Internet and technology companies like e.Digital Corp. and Pets.com that they drove the Nasdaq composite up 85.6 percent, the biggest gain for any major market in a single year in market history. Bill Gates’ personal fortune broke the $100 billion mark as the value of Microsoft stock surged, making him the richest person in the world by a wide margin. Rolling in at Nos. 3 and 4 on the list of the world’s richest people that year were Paul Allen, another Microsoft founder, and Steve Ballmer, an early hire to Microsoft’s executive team.
But technology stocks weren’t the only thing making people rich. In March 1999, the Dow Jones Industrial Average broke 10,000 for the first time; two months later, it would break 11,000. Despite the downfall of some legendary money managers like John Merriwether, some non-tech value investors were sitting pretty. Take Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) Chairman and CEO Warren Buffett, for example. Buffett, arguably the most successful investor alive, prevented a clean sweep by Microsoft shareholders of the top three slots on the world’s richest list in 1999, with a worth of about $36 billion (Gates, for the record, ended the year at about $90 billion).
So what was Buffett, a famously tech-adverse investor, doing at the time the tech czars came to power? And what has he been doing since, if not investing in the perpetual high-growth machine that is technology sector?
If you’re familiar with Buffett’s approach to investing, then you may already know the answer. Back then, Buffett was doing exactly what he had been doing for years and still does to this day: investing in great companies at good prices. In fact, Buffett still currently holds major positions in many of the companies he was invested in 15 years ago. Here’s a look at some of them.
1. American Express (NYSE:AXP)
“A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” Buffett wrote in his 2007 letter to Berkshire shareholders. “The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with ‘Roman Candles,’ companies whose moats proved illusory and were soon crossed.”
Since Buffett wears his investment philosophy on his sleeve, it should come as no surprise that Buffett either owns outright or owns major stakes in all the businesses mentioned above. Buffett has held a position in American Express since the 1960s, when he bought the stock on the cheap after a series of bad loans and a fraud scandal drove shares down — a classic example of Buffett practicing what he preaches. Not only did he buy when others were fearful, but he clearly bought a great company at a good price. Shares of the financial services company have not only outperformed the S&P 500 over the past 30 years, but the stock has performed particularly well in the wake of the financial crisis and current sits near record highs.
At the end of 2013, Berkshire owned 14.2 percent of American Express, a position with a cost basis of about $1.3 billion and a 2013 year-end market value of about $13.8 billion.
2. Coca-Cola (NYSE:KO)
Coca-Cola has become the go-to example of a company with the kind of enduring economic moat that Buffett described in the 2007 letter to shareholders. The company, apparently against enormous odds, built one of the world’s most valuable brands on the back of a soft drink with a secret recipe. More impressively, the value of that brand has withstood the test of time, and even in today’s tech-driven market remains at the top of the list.
According to Interbrand, Coca-Cola was the world’s third-most valuable brand in 2013, worth $79.2 billion. However, this was up just 2 percent from 2012, which is painfully slow compared to the 28 percent and 34 percent growth rates enjoyed by Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL), which are No. 1 and 2, respectively, on the brand leader board.
Still, no other soft drink maker comes close crossing Coca-Cola’s moat (which we assume is filled with Coca-Cola itself). PepsiCo. (NYSE:PEP), the closest brand-value competitor to Coca-Cola in the beverage sector, clocks in at 22 on the leaderboard, with a brand value of about $17.9 billion, less than one-third the value of Coca-Cola’s brand.
Buffett began digging into Coca-Cola in 1988 and quickly made the company one of his most important holdings. At the end of 2013, Berkshire owned 9.1 percent of the company, a position with a cost basis of about $1.3 billion and a year-end market value of $16.5 billion.
3. Wells Fargo (NYSE:WFC)
“Now, when buying companies or common stocks,” Buffett wrote in his 1989 letter to Berkshire shareholders, “we look for first-class businesses accompanied by first-class managements.” Ostensibly, this means Wells Fargo. Buffett first invested in the bank in 1989 and has been seriously adding to his position for nearly a decade.
At the time of his first purchase, Buffet told Berkshire shareholders that, “With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen.” Reichardt was president of the bank from 1978 to 1984 and chair of the institution until 1994; Hazen succeed Rechardt as president until 1998, and later as chair until 2001.
Buffett owned 5 million shares of Wells Fargo stock in 1990 for a cost of $289.4 million. He’s bought in at a number of different price points since, but his philosophy appears to have remained the same. He’s continued to add to his position based on the idea that Wells Fargo is one of the best banks in the business being run by some of the best people in the business. At the helm right now is John Strumpf.
At the end of 2013, Berkshire owned 9.2 percent of the bank, a position with a cost basis of about $11.9 billion and a year-end market value of about $22 billion.
4. Washington Post Co., now Graham Holdings (NYSE:GHC)
In 1973, Buffett made a $10.6 million investment in the Washington Post Co. Just over 10 years later, as he explained in his 1985 letter to shareholders, the investment sank to a market value of about $8 million, a loss of nearly 25 percent. At a glance, it was a crushing defeat for a then still-rising investment manager.
But Buffett, perennially patient, was unfazed. In the same letter, he told his shareholders not that the investment was a bad idea, but that, “What we had thought ridiculously cheap a year earlier had become a good bit cheaper as the market, in its infinite wisdom, marked WPC stock down to well below 20 cents on the dollar of intrinsic value.”
Buffett told his shareholders, “You know the happy outcome.” Shortly after Buffett invested his millions and the market decided to keep selling, Kay Graham, then CEO of the Washington Post Co., “had the brains and courage to repurchase large quantities of stock for the company at those bargain prices” — a result of the inexplicable fire sale — “as well as the managerial skills necessary to dramatically increase business values.”
The rest, in retrospect, is history. The company’s market value soared. According to Buffett’s calculations in 1985, Berkshire Hathaway proceeds from the investment totaled $221 million, some $160 million greater than the same investment in “any of a half-dozen media companies that were investment favorites in mid-1973″ would have yielded. By 2013, Berkshire’s 1.7 million shares in Graham Holdings were worth nearly $1 billion.
But for better or worse, Berkshire announced in April that it would be divesting most of its position in Graham Holdings. Berkshire will be exchanging approximately 1.6 million shares of Graham Holdings stock for a wholly owned subsidiary of the company and some extra cash to make of the difference. One notable property being absorbed by Berkshire is WPLG, a Miami-based television station affiliated with the American Broadcasting Company that serves the southeast coastal region and the Keys. The transaction appears to be in line with a pro-local news argument that Buffett has made fairly consistently throughout his career.
The announcement of the transaction marks the beginning of the end of Buffett’s 40+ year position in The Washington Post Co. / Graham Holdings. The company is very different today than it was at the beginning of the relationship. Much of the original team that Buffett worked with when he was a member of the board is no longer around. The Washington Post publication is now owned by Amazon (NASDAQ:AMZN) founder Jeff Bezos. Buffett’s trade suggests he still sees value in some of the assets owned by Graham Holdings, but without the flagship newspaper Graham Holdings does appear to offer what Buffett is looking for any longer. The business that Buffett invested in fell out from the company that the stock belonged to.
[Editor's note: This article has been updated to include the 2014 swap of Graham Holding stock for WPLG and cash. The deal was officially announced in April of 2014, but filings with the Securities and Exchange Commission show that Berkshire still owned its Graham Holdings stock as of March, the most recent month for which there is information.]