Berkshire Hathaway 4th Quarter 2013 13F-HR

The Berkshire Hathaway (BRKa) 4th Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 3rd Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*

New Positions
Goldman Sachs (GS): Bought 12.6 million shares worth $ 2.1 billion**
Liberty Global (LBTYA): 2.9 million shares worth $ 246.5 million

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential. Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Added to Existing Positions
Wells Fargo (WFC): Bought 326,500 shares worth $ 15 million, total stake $ 21.4 billion
Exxon Mobil (XOM): 1.04 million shares worth $ 97.9 million, total stake $ 3.9 billion
Wal-Mart (WMT): 236,498 shares worth $ 17.9 million, total stake $ 3.75 billion
U.S. Bancorp (USB): 203,400 shares worth $ 32.2 million, total stake $ 3.2 billion
DaVita (DVA): 5 million shares worth $ 332.8 million, total stake $ 2.4 billion**
USG Corporation (USG): 17.8 million shares worth $ 610.4 million, total stake $ 1.2 billion**
General Electric (GE): 9.99 million shares worth $ 257.3 million, total stake $ 272.5 million**

Reduced Positions
Moody's (MCO): Sold 252,400 shares worth $ 20.1 million, total stake $ 1.96 billion
ConocoPhillips (COP): 2.45 million shares worth $ 160.5 million, total stake $ 726.1 million
Liberty Media Corporation (LMCA): 322,340 shares worth $ 43.6 million, total stake $ 716.8 million
Suncor (SU): 5 million shares worth $ 167.3 million, total stake $ 434.2 million
Starz (STRZA): 1.1 million shares worth $ 32.3 million, total stake $ 135.6 million

Sold Positions
Dish Network (DISH): Sold 547,312 shares worth $ 31.1 million
GlaxoSmithKline (GSK): 345,819 shares worth $ 19.3 million

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio, even if they still manage a small percentage of the overall portfolio.

These days, any changes involving smaller positions will generally be the work of the two portfolio managers (even if some individual positions are becoming more substantial).

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer and, to a less extent, technology (primarily IBM) stocks.

1. Wells Fargo (WFC) = $ 21.4 billion
2. Coca-Cola (KO) = $ 15.6 billion
3. American Express (AXP) = $ 13.5 billion
4. IBM (IBM) = $ 12.5 billion
5. Procter and Gamble (PG) = $ 4.2 billion

As is almost always the case, it's a very concentrated portfolio.

The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.***

We'll get firm numbers when the annual report is released, but the combined portfolio value (equities, bonds, cash, and other investments) will likely exceed $ 210 billion.

The above portfolio, of course, excludes all the operating businesses that Berkshire owns outright with ~ 290,000 employees.

Here are some examples of the non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, and Oriental Trading Company.
(Among others.)

Then there's also the deal Berkshire closed last year for 50% ownership of H.J. Heinz.

In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.

See page 106 of the annual report for a full list of the operating businesses.

Adam

* All values calculated below are based upon Friday's closing price.
** Goldman Sachs and General Electric common shares came from warrants converted via net share settlement. Convertible notes of USG were also converted into common shares of USG. These all came out of moves made by Buffett during the financial crisis. Berkshire received shares in Goldman Sachs and General Electric from exercised warrants with both deals being amended from cash settlement to net share settlement. The DaVita moves were first disclosed in early December.
*** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (POSCO, Sanofi, Tesco PLC, etc.) is updated in the annual letter. So the only way any of these stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR. The preferred shares in Bank of America are also not included in the 13F-HR.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Munger's Daily Journal Reveals Holdings

Charlie Munger has, on prior occasions, talked about the importance of patience combined with acting decisively when opportunity presents itself:

Success means being very patient, but aggressive when it's time. - Charlie Munger at the 2004 Wesco Shareholder Meeting

and

If you took the top 15 decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor. - Charlie Munger at the 2004 Wesco Shareholder Meeting

In addition to his role as vice chairman at Berkshire Hathaway (BRKa), Munger also serves as chairman of Daily Journal (DJCO) and naturally has plenty of influence over their investments.*

Well, earlier this week, the company provided details for the first time of their common stock positions.

More on that in a bit but first some background.

This 10-Q from a couple of years back outlined some of their moves (without naming specifics) into marketable securities in recent years:

In February 2009, the Company purchased shares of common stock of two Fortune 200 companies and certain bonds of a third, and during the second and the third quarters of fiscal 2011, the Company bought shares of common stock of two foreign manufacturing companies. During the first quarter of fiscal 2012, the Company bought shares of common stock of another Fortune 200 company. The investments in marketable securities, which cost approximately $45,166,000 and had a market value of about $76,213,000 at December 31, 2011...

Now, compare that to this 8-K that was filed earlier this week:

At December 31, 2013, the Company held marketable securities valued at $150,747,000, including unrealized gains of $102,770,000.

It goes on to say:

The marketable securities consist of common stocks of three Fortune 200 companies, two foreign companies and certain bonds of a sixth, and most of the unrealized gains were in the common stocks.

So it at least appears they still basically have the same positions that were established between February 2009 and early in fiscal 2012 (though, since the cost basis has risen slightly, at least some additional moves -- even if minor in percentage terms -- have been made since then), and we now have a relatively up-to-date view of how well these moves have worked out (so far).

For some context, keep in mind that Daily Journal had a bit less than $ 22 million in cash, U.S. Treasury Notes and Bills at the end of their 2008 fiscal year. They wisely held this rather conservative allocation until prices became extremely attractive in early 2009 then deployed it, along with retained earnings, aggressively into shares of businesses they apparently consider attractive.**

So I'd say they've allocated their capital rather well and that this exemplifies being very patient then acting decisively when the opportunity arises.

As I mentioned above, thanks to this recent 13F-HR, we also now know what 4 of the marketable securities they invested in happen to be:

Wells Fargo (WFC): $ 72.3 million
Bank of America (BAC): $ 35.8 million
U.S. Bancorp (USB): 5.7 million
POSCO (PKX): 5.0 million

That leaves, after subtracting the value of these 4 stocks from the total of $ 150.7 million noted in the 8-K filing, roughly $ 31 million for the remaining marketable securities. So nearly 80% of the portfolio is in just four stocks and, to say the very least, is heavily weighted toward financials. 

Not exactly textbook portfolio management and, well, not exactly surprising.

Munger has talked in the past about his views on the need (or lack thereof) for diversification.***

"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?" - Charlie Munger in Kiplinger's

"I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken." - Charlie Munger in a 1998 speech

I'd say that the concentration of this portfolio more than reinforces his point.

Unlike the position in POSCO, which is an ADR, it might turn out that the fifth stock (as indicated in the 8-K filing), is listed on an exchange outside the United States. 
(Shares not listed on an exchange inside the United States need not be included in a 13F-HR.)

It seems fair to say that, other than possibly the common stock of Bank of America, none of these positions should really come as a surprise.

Berkshire owns the common shares of Wells Fargo, U.S. Bancorp, and POSCO along with preferred shares of Bank of America.

Adam

(Correction: Charlie Munger's thoughts above on the need for lots of patience followed by aggressive action when the opportunity presents itself are from Whitney Tilson's notes taken at the 2004 Wesco meeting. The initial version of this post had it as the 2004 Berkshire meeting.)

No position in DJCO. Long positions in WFC, USB, and BAC established at much lower than recent market prices. Also, small long position in PKX established near current prices.

* From this 10-Q: The Company's Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company's Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.
** Earnings for Daily Journal came in at ~ $ 8 million per year or slightly less in 2009-11 but was down substantially from those levels in 2012-13. Now, comprehensive full year 2013 financials and the most recent fiscal 1st quarter financials have not yet been made available. The company has said they won't submit a filing (for either reporting period) until internal controls are properly assessed. Here's how they explained it in December of 2013:
Due to a significant increase in the Company's stock price in 2013, the Company no longer qualifies as a smaller reporting company and is now an accelerated filer for the first time. Accordingly, this is the first fiscal year for which an audit of the Company's internal control over financial reporting is required...
So, instead, we only have preliminary full year results. It's worth noting that, during the fiscal year 2013, the company also took on $ 14 million of margin debt, bought New Dawn Technologies, Inc. for $ 14 million -- $ 11.8 million net of cash acquired -- and bought ISD Corporation for approximately $ 16 million.
*** Munger clearly doesn't think much of diversification but does say most individual investors should probably be buying index funds: "Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund." As far as picking stocks he says: "You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge." 
Some will underestimate the difficulty of getting satisfactory results picking individual stocks over the long haul and, mistakenly, will also underestimate the wisdom of owning (i.e. not trading) low cost index funds instead. Those who concentrate their holdings and are overconfident in (or overestimate) their own investment capabilities seem destined for poor or even disastrous results. Portfolio concentration may make lots of sense for the likes of Munger and similarly capable investors, but it's probably going to make a whole lot less sense for many others. So it's knowing limits and staying well within them.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Asset Growth and Stock Returns

From this 2008 paper:

Asset Growth and the Cross-Section of Stock Returns

"ONE OF THE PRIMARY FUNCTIONS OF CAPITAL MARKETS is the efficient pricing of real investment. As companies acquire and dispose of assets, economic efficiency demands that the market appropriately capitalizes such transactions. Yet, growing evidence identifies an important bias in the market's capitalization of corporate asset investment and disinvestment. The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spinoffs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns."

A recent Barron's article explained it this way:*

Barron's: Buy the Asset Sellers

"A 2008 study published in the Journal of Finance found that over the long term, U.S. stocks in the market's bottom decile ranked by recent asset growth outperformed those in the top decile by 13 percentage points a year."

The article also points out that...

"A 2012 paper that focused on international markets reported similar findings."

The paper's findings (on page 1610) reveal specifically the following gap in performance from 1968 through 2003:

Value weighted (VW) returns for firms with lowest asset growth: 18%

Value weighted (VW) returns for firms with highest asset growth: 5%

"...we find that raw value-weighted (VW) portfolio annualized returns for firms in the lowest growth decile are on average 18%, while VW returns for firms in the highest growth decile are on average much lower at 5%."

So there is the 13% gap but the paper also notes that "with standard risk adjustments the spread between low and high asset growth firms remains highly significant at 8% per year for VW portfolios and 20% per year for equal weighted (EW) portfolios."

I am highly skeptical of the "standard risk adjustments" but that's a subject for another day. Still, even using the most conservative numbers from this paper, the gap is not at all insignificant.

The paper concludes by calling this "a substantial asset growth effect on firm returns."**

I've mentioned the following quote before but, due to its relevance, I'll include it here for those who may not be familiar with it:

"Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive." - Warren Buffett in the 1992 Berkshire Hathaway (BRKa) Shareholder Letter

The bottom line is to avoid the misjudgment that exciting growth must necessarily lead to high returns. That growth might be a negative factor may or may not be counterintuitive, but understanding it is very useful and important. On occasion, high growth requires so much capital that returns are poor for owners. Other times, fast growth attracts competitors, fresh capital, and possibly a disruption that changes what, for a time at least, looked like attractive economics. The list goes on. There are many variations of this that tend to be very industry specific.
(Consider how often growth is mentioned on a major business media outlet with at least the implied assumption that growth must be a good thing. Another way to think about it is this: In that context how often -- though, admittedly, a subtlety even if a crucial one -- is the potential negative implications of growth written about or discussed? I think we're talking, at best, about exceptions to the rule.)

In contrast, sometimes -- though it is far from assured -- the boring, stable, firms with only modest or low growth prospects establish themselves in a competitive framework that allows the strongest to maintain attractive return on capital for a very long time. Now, there are, without a doubt, many examples of growth being a very good thing for investors. The problems arise when growth is assumed to always be somewhere between a good and a great thing for investors; they arise when no consideration is given to the alternative implications of growth; they also arise when extreme an premium price is paid -- relative to approximate intrinsic value -- upfront for that potential growth.***

High growth rates and attractive long-term investment outcomes need not have much to do with each other.

The main point is that growth is often treated as always being a good thing. Well, sometimes growth is of the low (or worse) return variety. Think airlines for many decades. That industry grew impressively for quite some time. Sometimes, too much is paid for the privilege of ownership because of the exciting growth prospects.

The study above happens to focus on asset growth and returns.

Well, this "asset growth effect" seems not at all limited to asset growth; it seems to apply to growth more generally (though certainly not a rule of some kind...there are plenty of examples of good growth). Below, I've included some related posts that may be of interest to explore further along these lines.

I happen to think it's not a bad habit to consider carefully things that conflict, contradict, or that might be inconsistent with what one is predisposed to think (or with prevailing wisdom). It's all too easy to quickly dismiss what's counterintuitive and just move onto the next thing. Some will run into an odd paradox, for example, and treat it as nothing more than an interesting anomaly. Too often -- or, at least, often enough -- that is a mistake. The biggest insights -- though, of course, not all -- can reside near what at first seems nonsensical. Occasionally, the most useful discoveries are found inside or near what initially seems unfamiliar, contradictory, and even uncomfortable.

Another mistake is to "write off" 100% of an investment idea due to some very real existing flaw. Well, sometimes the part that is right can be very useful (i.e. lucrative) while the downside (or cost) of what's wrong is very small. In the real world, more often than not, solutions are usually going to at least somewhat messy and incomplete. Investment is always the weighing of various pros and cons. It's making smart trade-offs between alternatives. It's about opportunity costs.

When something doesn't sit well with what is preconceived, it's just generally not a good idea to ignore it. In fact, to me it's better to develop a tendency to do the exact opposite. Admittedly, this frequently leads nowhere but, at least, new things are learned. In fact, I'd argue it's best to study and try to learn from those kinds of things at least 2 or 3 times as hard as one might otherwise be inclined to do.

I've not yet found the perfect investment and, well, I won't.

Yet plenty of good but flawed ones exist.

Attractive return on capital that's sustainable long-term and purchased at the right price (i.e. plain discount to value) is a priority.

Growth, in a vacuum, isn't.

Sometimes growth leads to the creation of enduring value for shareholders, but too often it leads to the exact opposite outcome:

Reduced rewards for the investor at greater risk of permanent capital loss.

Adam

Long position in BRKb established at much lower than recent market prices

Related posts:
Buffett and Munger on See's Candy: Part II - June 2013
Buffett and Munger on See's Candy - June 2013
Aesop's Investment Axiom - February 2013
Grantham: Investing in a Low-Growth World - February 2013
Buffett: Stocks, Bonds, and Coupons - January 2013
Maximizing Per-Share Value - October 2012
Death of Equities Greatly Exaggerated - August 2012
Stock Returns & GDP Growth - July 2012
Why Growth Matters Less Than Investors Think - July 2012
Ben Graham: Better Than Average Expected Growth - March 2012
Buffett: Why Growth Is Not Necessarily A Good Thing - Oct 2011
Buffett: What See's Taught Us - May 2011
Buffett on Coca-Cola, See's & Railroads - May 2011
Buffett on Pricing Power - February 2011
Grantham: High Growth Doesn't Equal High Returns - Nov 2010
Growth & Investor Returns - June 2010
High Growth Doesn't Equal High Investor Returns - July 2009
The Growth Myth Revisited - July 2009
Pricing Power - July 2009
The Growth Myth - June 2009
Buffett on Economic Goodwill - April 2009

* The title of this article alone pretty much says it all:

Fast firm growth doesn't mean great stock returns

"It may surprise most investors that firms experiencing rapid growth subsequently have low stock returns, whereas contracting firms enjoy high future returns. For example, a 2008 study found that a value-weighted portfolio of U.S. stocks in the top asset-growth decile underperformed the portfolio of stocks in the bottom decile by 13 percent per year for the period 1968-2003. A recent paper shows that the same is true internationally as well."

** From the conclusion: "Over our sample period firms with the low asset growth rates earn subsequent annualized risk-adjusted returns of 9.1% on average while firms with highest asset growth rates earn - 10.4%. The large 19.5% spread is highly significant. Weighting the firms by capitalization reduces the spread to a still large and significant 8.4% per year." The 13% gap noted above is value weighted (VW) but not adjusted for risk. Take your pick. These all represent rather significant gaps in performance.
*** On the surface, estimating intrinsic business value on a per share basis isn't necessarily difficult. As Buffett has said: "Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life." So just figure out what cash can be taken out of a business over the long haul then discount that cash appropriately, right? Not so fast. The definition is simple. The calculation itself is not. It's, in part, the assumptions (interest rates, future cash flows, how well future cash will be put to work, etc.), some of it hard to quantify but important stuff, that make the actual calculation more difficult and, inevitably, at best a range of possible values (even if the mechanics aren't that tough to learn). Buffett has also said there are good reasons "we never give you our estimates of intrinsic value." (The one explicit reason Buffett mentions being that not even Charlie Munger and himself will come up with the same intrinsic value estimate using the same facts.) Instead, he prefers to provide "the facts that we ourselves use to calculate this value." In the 2011 letter, Buffett explained that while they "have no way to pinpoint intrinsic value," a useful -- even if "considerably understated" -- proxy happens to be book value. This older post on how Buffett likes to specifically discount cash in order to calculate value might be of interest to some.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.