Category Archives: Marketable securities

Does Warren Buffett or Berkshire Hathaway hold certain stocks forever?

Does Warren Buffett or Berkshire Hathaway hold certain stocks forever?

To answer this question, one needs to go back to Berkshire Hathaway’s 2016 Annual Report 2016, in which chairman Warren Buffett said:  “Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.”

What could have prompted the implication by shareholders and the media that Warren Buffett holds certain stocks forever?

Warren Buffett said in Berkshire Hathaway’s 2016 Annual Report said: “Confusion about this point may have resulted from a too-casual reading of Economic Principle 11 on pages 110 – 111, which has been included in our annual reports since 1983. That principle covers controlled businesses, not marketable securities. This year I’ve added a final sentence to #11 to ensure that our owners understand that we regard any marketable security as available for sale, however unlikely such a sale now seems.”

What is Warren Buffett’s Economic Principle 11 and what is the final sentence that was added in 2016 to this principle? Let’s explore.

Background: In June 1996, Berkshire’s chairman Warren Buffett  issued a booklet entitled “An Owner’s Manual” to Berkshire’s Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of operation.

There were originally 13 economic principles which Warran Buffett set up in 1983. The 2016 Annual Report provided an updated version of “An Owner’s Manual”.

Economic Principle 11 goes like this:

You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.
“We continue to avoid gin rummy behavior. True, we closed our textile business in the mid-1980’s after 20 years of struggling with it, but only because we felt it was doomed to run never-ending operating losses. We have not, however, given thought to selling operations that would command very fancy prices nor have we dumped our laggards, though we focus hard on curing the problems that cause them to lag. To clean up some confusion voiced in 2016, we emphasize that the comments here refer to businesses we control, not to marketable securities.”

The last sentence in Berkshire Hathaway Economic Principle 11 made it clear that Warren Buffett’s comments refer to businesses that Berkshire Hathaway owns and not to marketable securities.

Why Warren Buffett sold about one-third of stake in IBM

Warren Buffett, who owned about 81 million shares in IBM at the end of 2016, sold off about a third of that stake in the first and second quarters of 2017.

He told CNBC this in a report dated May 4, 2017 (Warren Buffett has sold IBM shares, and ‘revalued’ tech icon downward, cites ‘big strong competitors’).

Mr Buffett’s FY2016 letter to Berkshire Hathaway, of which he is chairman and CEO, showed that at end-2016, the company owned  81,232,303 shares in IBM. The cost was US$13,815 million. “This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-downs that have been required under GAAP rules,” said Mr Buffett in the shareholder letter.

Berkshire Hathaway first bought into IBM in 2011. A Reuters report (Nov 24, 2011) headlined “Buffett sheds tech aversion with big IBM investment” said: “Warren Buffett has always made his distaste for technology investments clear, but on Monday he changed his ways in spectacular fashion. The Berkshire Hathaway chief executive said he has bought nearly $11 billion of International Business Machines Corp (IBM) stock in the last eight months, building a roughly 5.5 percent stake that potentially makes him the largest shareholder in the company.”

At that time in 2011, Mr Buffett was also  quoted as saying in an interview on cable television network CNBC that he was struck by IBM’s ability to retain corporate clients, which made it indispensable in a way that few other services were.

Why then did he slash the stake in 2017? The CNBC May 4, 2017, report on Mr Buffett’s slashing of the IBM stake quoted him as saying: “I don’t value IBM the same way that I did 6 years ago when I started buying… I’ve revalued it somewhat downward.”

“When it got above $180 we actually sold a reasonable amount of stock,” said Mr Buffett.

According to Mr Buffett, IBM hadn’t performed the way he had expected — or the way IBM’s management had expected — when he first started buying the shares six years ago.

“IBM is a big strong company, but they’ve got big strong competitors too,” said Mr Buffett.

Mr Buffett also said he had stopped selling. At that point, IBM shares were trading below US$160.

When it comes to stocks, Berkshire Hathaway looks for wonderful companies

“Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night,” Warren Buffett said in his FY2015 letter to Berkshire Hathaway. Why did the Berkshire Hathaway chairman say this?

“In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us,” Mr Buffett continued.

A stockpile of funds from marketable securities?

Yes a stockpile. “Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our ownership to 8.4% versus 7.8% at yearend 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8% to 15.6%. In case you think these seemingly small changes aren’t important, consider this math: For the four companies in aggregate, each increase of one percentage point in our ownership raises Berkshire’s portion of their annual earnings by about $500 million.”

The legendary investor’s subsequent FY2016 letter to Berkshire Hathaway shows the stakes in these Big Four as at end-2016 were: American Express 16.8%, Coca-Cola 9.3%, IBM 8.5% and Wells Fargo 10%. Apple Inc stocks also came into Berkshire Hathaway’s radar screen, with the group owning a stake of 1.1%, which, according to a CNBC report on Feb 27, 2017, had grown in January 2017 to 2.5%. “At this point, Buffett owns US$17 billion worth of the tech giant’s stock,” said the report.

What does Berkshire Hathaway look for in marketable securities?
On the Big Four in the FY2015 letter, Mr Buffett said that the four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented. “Their returns on tangible equity range from excellent to staggering. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone,” said Mr Buffett.

The Berkshire Hathaway chairman said that if Berkshire’s yearend holdings were used as the marker, its portion of the “Big Four’s” 2015 earnings amounted to US$4.7 billion. “In the earnings we report to you, however, we include only the dividends they pay us – about $1.8 billion last year. But make no mistake: The nearly $3 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.”

The earnings of Berkshire’s investees retain are often used for repurchases of their own stock – a move that increases Berkshire’s share of future earnings without requiring it to lay out a dime. “The retained earnings of these companies also fund business opportunities that usually turn out to be advantageous. All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time. If gains do indeed materialize, dividends to Berkshire will increase and so, too, will our unrealized capital gains.”

This investment philosophy gives Berkshire Hathaway a significant edge, explained by Mr Buffett this way: “Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant edge over companies that limit themselves to acquisitions they will operate.”

Warren Buffett loves Apple

Warren Buffett’s FY2016’s letter dated February 25, 2017, to Berkshire Hathaway shareholders showed the group had 61,242,652 Apple Inc shares, a stake of 1.1 per cent costing US$6.747 billion and worth a market value of US$7.093 billion. This has since doubled. According to a CNBC report on Feb 27, 2017, the stake had doubled in January 2017 to 2.5 per cent. “At this point, Buffett owns US$17 billion worth of the tech giant’s stock,” said the report.
Berkshire Hathaway also has stake in IBM. The FY2016 shareholder letter showed that it had 81,232,303 IBM shares as at Dec 31, 2016, a holding of 8.5 per cent costing US$13.815 billion and having a market value of US$13.484 billion.

IBM shares down but Warren Buffett could be happy

ibmExcerpt from a CNN Money report, How to invest like a billionaire, dated 31 December 2014: “The company (Warren) Buffett may regret buying the most this year though is IBM…It’s by far and away the worst performer among the 30 top American businesses in the Dow. IBM is trying to reinvent itself by laying off workers and selling its chip unit at a loss. Buffett likes to stick with companies for the long-term, but so far, other investors aren’t impressed with the turnaround plan.”

What is bad news to other IBM investors may be good news to Warren Buffett. This post tells the reason: “Why Warren Buffett wants the shares of IBM to languish”.

Related posts: (1) “Why Warren Buffett invests in IBM”

(2) Why Warren Buffett sold about one-third of stake in IBM

Recommended reading:

Berkshire Hathaway Letters to Shareholders, 1965-2013

Berkshire Hathaway’s fifteen common stock investments that at FY2013 yearend had the largest market value

 

12/31/13
Shares** Company Percentage owned Cost* Market
(in millions)
151,610,700 American Express Company 14.2 $1,287 $13,756
400,000,000 The Coca-Cola Company 9.1 1,299 16,524
22,238,900  DIRECTV 4.2 1,017 1,536
41,129,643 Exxon Mobil Corp 0.9 3,737 4,162
13,062,594 The Goldman Sachs Group, Inc 2.8 750 2,315
68,121,984 IBM Corp 6.3 11,681 12,778
24,669,778  Moody’s Corporation 11.5 248 1,936
20,060,390 Munich Re 11.2 2,990 4,415
20,668,118  Phillips 66 3.4 660 1,594
52,477,678 The Procter & Gamble Co 1.9 336 4,272
22,169,930  Sanofi 1.7 1,747 2,354
301,046,076   Tesco plc 3.7 1,699 1,666
96,117,069 U.S. Bancorp 5.3 3,002 3,883
56,805,984  Wal-Mart Stores, Inc 1.8 2,976 4,470
483,470,853 Wells Fargo & Company 9.2 11,871 21,950
Others 11,281 19,894
Total Common Stocks Carried at Market $56,581 $117,505
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases
because of write-ups or write-downs that have been required under its rules.
**Excludes shares held by Berkshire subsidiary pension funds.

Data source: Warren Buffett’s letter dated February 28, 2014 for FY2013 to Berkshire Hathaway shareholders

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013