Here’s What Warren Buffett Is Doing With His Money

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Warren Buffett is one of the most successful investors of our time. As a result, investors like to watch what he is doing with his money in order to get ideas. Often times when his Berkshire Hathaway (NYSE:BRK.A) reports its updated holdings we can see some meaningful swings in the stocks he is buying and selling.

However, before I list Mr. Buffett’s most recent portfolio changes, I want to warn investors that blindly following Warren Buffet into his investments is a bad idea. There are three reasons for this.

The first is that While Mr. Buffett is talented, he is not infallible. He has made several lousy bets over the years along with his excellent bets, and so you still need to do your own due diligence when picking stocks. Warren Buffett’s picks give you a place to start, but that’s all.

Second, while Mr. Buffett stresses that you should have a full understanding of the businesses that you invest in, keep in mind that many of the businesses he invests in are fairly complicated. Whether he is neglecting his own advice is debatable, but I would avoid stocks in, for example, financial and insurance institutions given their opaque derivative holdings.

Third, as a small investor you have a lot of options available to you that Mr. Buffett does not. With a $312 billion market capitalization, Berkshire Hathaway pretty much has to buy mid-cap and large-cap companies in order to move the needle. It isn’t worth his time to buy a $300 million market cap company even if it is worth $500 million. But as a retail investor you can take advantage of such a situation. Keep in mind that smaller, esoteric companies are more likely to be mispriced because fewer investors have discovered them, and so there are a lot of advantages in looking for opportunities here. Keep in mind that Mr. Buffett started out by finding mispriced companies that were under the radar.

Similarly Mr. Buffett cannot buy shares in some companies because it would violate anti-trust laws. For instance when he bought the railroad company Burlington Northern Santa Fe he had to sell his stakes in other railroad companies. So it is possible that if he weren’t restricted legally that he would have bought railroad companies last quarter.

What these three points boil down to is that you should emulate Buffett’s strategy, not imitate it.

With these points in mind let’s look at a couple of Buffett’s portfolio changes according to Berkshire Hathaway’s SEC filings.

First, he added Verizon (NYSE:VZ) to his portfolio. Verizon is a leading telecommunications company in the United States that recently surpassed AT&T as the most valuable in the United States. While it trades at a premium to AT&T on a P/E basis, keep in mind that AT&T has been the target of criticism over the past several years — people don’t like its phone or internet service. Verizon services are generally considered to be high quality, and the company has grown as a result. Thus it is no wonder that Mr. Buffett cited managerial competence as a reason for adding Verizon to his portfolio. The stock trades at just 10.7 times earnings and pays a 4.4 percent dividend. Ultimately I think this is a good defensive stock, although I think more enterprising investors might consider similar opportunities overseas in countries where the demographic situation favors more growth. For instance China Mobile (NYSE:CHL) is an intriguing alternative, although this is not an “either/or” situation.

Second, Mr. Buffett added to his Wal-Mart (NYSE:WMT). Investors sold off shares of Wal-Mart today due to weak earnings, and generally analysts were not happy with the report. But one earnings report hardly negates the long term investment thesis in this best of breed retailer. Wal-Mart offers compelling value to consumers, and it is able to do so because of its size and its incredible distribution infrastructure. Furthermore, despite a weak earnings report the fact remains that Wal-Mart has been outperforming the generally weak retail space. While I don’t particularly like retailers due to the incredibly competitive nature of the industry, Wal-Mart is an exception, and it should be bought on weakness.

Third, Mr. Buffett added IBM (NYSE:IBM) to his portfolio. Despite his recent confidence in this stock — it has recently become one of his largest holdings — I fail to see the appeal. IBM is a technology company, and this is a sector that Buffett has avoided because technology is outside his “circle of competence,” meaning he doesn’t fully understand it. Yet for some reason, IBM has been an exception. The company has been reporting shrinking sales with regularity, and while it was able to boost earnings through cost cutting measures this trend has recently reversed. But even when it did, the company’s earnings per share grew as a result of the company’s massive stock buyback program. Finally, in the most recent quarter, even EPS declined.

While Buffett has faith in management, I think it is evident that this could have been avoided if the company had reinvested more capital into its business rather than buying back stock. With trailing earnings of $14.66/share, I doubt the company will reach its long-stated goal of earning $20/share in 2015 unless it buys back an incredible amount of stock, in which case management would be jeopardizing the financial security of the company. Given these points I would avoid this Buffett favorite.

Other notable changes include an addition of shares in Davita (NYSE:DVA), which provides dialysis services, and a reduction in his GM (NYSE:GM) stake. The former makes sense as it is a very stable business with recurring cash-flow, although it is somewhat expensive. The latter also makes sense because the auto industry is highly cyclical, and Buffett tends to avoid such investments.

Earlier, we wrote about a few simple principles that Buffett follows while looking for investment options. Here’s a recap:


1. Invest within your circle of competence

Investors think that they can outsmart the market by finding the next big thing. Whether it’s social media, 3-D printing, or rare earth metals, it is incredible how a few news stories and stock price increases can create an entire group of people devoted to a particular sector of the economy. But at the same time, these people probably don’t know much about these sectors. Do retail investors honestly know how a 3-D printer work, or how a computer chip works? Probably not. But that doesn’t stop them from buying 3D Systems (NYSE:DDD) or Intel (NASDAQ:INTC). While they may make money, they won’t do so because they understand their investments.

Buffett’s response to these investing frenzies is to invest in what you know. While you probably don’t know how a computer chip works or why Intel makes computer chips that people want to buy, you probably know, for instance, why Coca-Cola (NYSE:KO) is such a popular drink: It tastes good and the company has exceptional marketing. Thus, Coca-Cola falls within your circle of competence even if you don’t know the company’s secret formula. All you need to know is why the company is successful, and you can postulate with relative certainty that this success will continue into the future.

Investing in companies that make simple products that you understand may be boring, but it is a winning approach that can generate a lot of value over time.

2. Buy wonderful companies at a fair price

The full saying is that it is better to buy a wonderful company at a fair price than a fair company at a wonderful price. When you are investing, you find value not just by looking at the numbers but by looking at intangible features as well such as management. A company that is well managed and that has a reputation for providing a quality product is worth more than a company lacking these qualities. The former company is positioned to take market share from the latter, and it is better positioned to withstand economic weakness. As a result, from a long-term perspective, it is better to pay a higher price-to-earnings ratio for the shares of a high-quality company than to pay a low price-to-earnings ratio for a low-quality company.

3. Be greedy when others are fearful, and be fearful when others are greedy

Once you have decided which companies to buy using the first two pieces of advice, you need to know when to buy them. As with anything else you buy, you want to get a good price. However, the market fluctuates wildly and frequently, and this adds an emotional element to investing that this piece of advice helps you avoid. When stocks go down, people often assume it is for a reason (i.e., the downturn is justified). Similarly, when a stock rises, people often assume that it is because the company is improving. But market price fluctuations do not have any necessary correlation to a company’s fundamentals. As a result, you want to pick out companies to buy and then wait for the hit prices that you feel make them worthwhile investments.

This piece of advice depends on the first two mentioned. You cannot be confident in buying a falling stock, especially if it goes down even more after you’ve first bought it, unless you are confident in the company’s underlying business. For this to take place, you need to understand how and why the company makes money, how and why it will continue to make money, and what makes it such a great company. If you can figure this out, then you can have the confidence to buy when there is proverbial blood in the streets.

Disclosure: Ben Kramer-Miller has no position in the stocks mentioned in this article.

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