Berkshire On My Mind
Originally, I had a totally different column planned but after talking to my good friend Dan Loney on Sirius XM’s Wharton Business Daily, I decided to talk about Warren Buffet and Berkshire Hathaway.
I don’t typically spend time on one stock or one legendary investor but today I will.
I don’t need to go into Buffet’s track record or his status as one of the greatest investors of all time. I think his performance, his ideas and his unique approach speaks for itself.
What I do want to rumble through is the most important question out there, “What will Warren do next?”Given the fact that Berkshire Hathaway has over 167 billion dollars of cash on hand and should he need to go to the debt market, probably 3 times that amount in addition.
Berkshire could probably buy pretty much any US company it wanted (Except for maybe Apple, Amazon, Facebook or Alphabet) and still have cash left over but where would it go?
This is a sort of investor parlor game people can play and it’s pretty simple. What company would Warren Buffet want to buy given his previous purchases.
Let’s do this in a simplistic way:
He eschews technology.
Other than Apple (which you could make a case for it being multiple things, technology, retail, entertainment, etc), Berkshire has said flat out, if they don’t get it, they don’t buy it. I am in that camp for sure. Did this maxim hurt his returns? Yes, for a year or two over the last 3 decades. Overall, slow and steady wins the race and the company is not in this for the short term. Still, some say he blew it with Amazon (they do own some but it’s minor) and Alphabet. I will bet a few shekels, his people are not going through the Pink Sheets looking for the next Facebook.
The business of America is business.
Look at the Berkshire Hathaway portfolio and you will see what I mean. Railroads, banking, energy, food and insurance. Sure they own some technology and maybe they will go deeper into data and possible cloud services but by and large, it’s biggest core positions are in names you know and love. Quality companies with high margin names. This is where they have traveled in the past and maybe they travel here in the future but the names are few and far between that have the quality they prefer at the right price.
It is about price.
Berkshire will never buy a fire sale. If a company is being sold off, generally it is for a very good reason. The people who are selling it are just as smart as Berkshire’s people and they have done their due diligence as well. So, if you see a quality name being sold off even in a positive market, don’t bet that Berkshire Hathaway is going to come in a swoop it up on the cheap. They don’t buy Dumpster fires. Having followed the company and the stock for years, I can tell you that right now they are at some barbecue place in Omaha not in front of their Bloombergs. The market is fully priced and every quality name that might interest Buffet is a top dollar number. He can afford it but why buy now when any major selloff will provide a much better opportunity. They buy on market weakness, not individual stock weakness.
The vision is the investment.
Warren Buffet at 60 was looking at stock 30 and 40 years out. Does quality outlast time? I remember the day that Berkshire Hathaway started accumulating American Express. I had been buying AXP for the company about three days before and I knew from experience that it was Berkshire buying right beside me. They had a certain way that they would buy intended targets. For a while they tried to mimic what I was doing for the company but every so often I would be prohibited by the rules from doing a certain thing and they would act decisively on it. I spoke to the treasurer of AXP about it and he said “That could be a good thing or that could be a bad thing”. I got what he meant. Two months later they announced they had purchased 60 million shares on their way to 150 million and I looked like a genius. They purchased the next 90 million shares over 10 years and it was obvious it was just a long term investment in a great company. That was in 1996. As investors, they look at the very long game.
Go with what you know.
This is actually the core investment philosophy of Peter Lynch when he was the portfolio manager for Fidelity’s Magellan Fund. Lynch believed if you couldn’t explain a company in two or three sentences, you were doomed. You had to now what a company did and what their current and future business strategies were before you start to peel the layers back and look into financials and what not. I am a firm believer in this strategy as you know. Keep it simple stupid. While Buffet will never get into that type of discussion, he has pretty much said he likes companies that he understands. Companies that are reflective of the US economy as a whole are his bread and butter but the World is changing and is this philosophy still viable? I say 100% yes. I know that we are on the precipice of a transition. We are going to see technology move even faster into new realms and if you totally understand it, great, but for someone who gets about 15% of all of these new breakthroughs, I am ok with stable, understandable companies that can develop technologies to make their companies more profitable. I don’t need to know how AXP knows my spending habits down to my toilet paper, I just need to know that my card is accepted at more and more places and when there is a problem, they have my back. My comfort is the key to their profits.
Now with all this in mind, where is Warren Buffet going to go next?