Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Warren Buffett: Working Hard or Hardly Working?

"Lethargy bordering on sloth remains the cornerstone of our investment style," said investing titan Warren Buffett in his 1990 letter to Berkshire Hathaway (NYSE: BRK-B  ) shareholders. What could the Oracle of Omaha mean?

An indolent investing style
Buffett likes to buy noncontrolling interests in great companies and watch them do the heavy lifting. As Buffett says of Berkshire's "Big Four" holdings -- Coca-Cola, (NYSE: KO  ) , Wells Fargo (NYSE: WFC  ) , IBM (NYSE: IBM  ) and  American Express (NYSE: AXP  ) :

At Berkshire we much prefer owning a non-Controlling but substantial portion of a wonderful business to owning 100% of a so-so business.Our flexibility in capital allocation gives us a significant advantage over companies that limit themselves only to acquisitions they can operate.

Buffett noted in last year's shareholder letter that he had added to, and will continue to add to, these four positions in the Berkshire portfolio.

Source: Berkshire Hathaway 2012 shareholder letter.

Easy as 1, 2, 3
The criteria for picking Berkshire's major holdings are the crux of Buffett's investing thesis.
First, he picks companies that have an "economic moat" -- in fact, he coined the term.

Second, he buys companies that are well established and well managed. As he says of the Big Four: "The four companies possess marvelous businesses and are run by managers who are both talented and shareholder-oriented."

Third, these companies should generate shareholder value with dividends and share repurchases. Buffett says:

The earnings that the four companies retain are often used for repurchases -- which enhance our share of future earnings -- and also for funding business opportunities that are usually advantageous. Over time we expect substantially greater earnings from these four investees. If we are correct dividends to Berkshire will increase and, even more important, so will our unrealized capital gains (which for the four, totaled $26.7 billion at year end.

Easy-peasy criteria
The best example of how it works with these four is Coca-Cola. Buffett's first business venture involved reselling Coca-Cola door to door. It has an enduring moat, and Buffett calls it "the most valuable franchise in the world."

It also has a 50-year history of consecutive dividend increases (it currently yields 2.8%) and a 28-year history of share repurchases, fulfilling Buffett's three criteria.

Buffett's favorite daily beverage may be Coca-Cola, but it represents a smaller stake than Berkshire's largest holding, Wells Fargo.

Wells-Fargo has a dominant position, serving a third of U.S. households. Its conservative management style helped it maneuver through the financial crisis. Even through the crisis, Buffett kept buying Wells Fargo, fully expecting it to come through with flying colors.

And Wells Fargo has come through for him, repurchasing $17 million in shares in its last quarter and almost doubling its yield from 2012 to 2.6%.

Although IBM stock has been under pressure of late, Buffett doesn't mind, saying he won't be selling IBM, and furthermore: "We should wish for IBM's stock price to languish throughout the five years."

Buffett's carefree attitude is based on his buyback calculus. Even if IBM stays flat, an $11.5 billion buyback  program, along with a 12% dividend increase, makes Buffett's current shares more valuable.

And history proves more buybacks are likely: The company has returned more than $150 billion to shareholders in the form of dividends and share repurchases. The company has slashed its share count by a third in 14 years and paid a continuous dividend -- now yielding 2% -- since 1916.

Buffett has owned a stake in American Express for almost 50 years. His original 5% stake has now grown to 13.7% of the company. Its high-visibility brand and strong customer loyalty give it a moat in the competitive financial-services sector.

In 2013 the company announced a 150 million-share repurchase program adding up to $4.2 billion worth of shares in 2013 and early 2014. Since 2012 the company has started raising its dividend again after temporarily curtailing raises during the recession. The yield now stands at 1%.

BRK.A Total Return Price Chart

BRK.A Total Return Price data by YCharts.

Making companies work for you
Of these great companies, Buffett said in 2012:

We expect the combined earnings of the four -- and their dividends as well -- to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.

Thanks partly to Buffett's laissez-faire stock thesis, Berkshire has a 19.7% compound annual book-value growth rate, having gone from $19 per class "A" share in 1964 to $126,766 per class "A" share as of Sept. 30, 2013.

Warren long ago made his investments work for him by choosing companies carefully. The Big Four have done the hard work as Warren reaps dividends and capital appreciation from what they sow. Remember what Warren said:

At bottom, we [Charlie Munger and Buffett] subscribe to Ronald Reagan's creed: "It's probably true that hard work never killed anyone, but I figure why take the chance."

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You’ve fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it’s too late!

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2807011, ~/Articles/ArticleHandler.aspx, 9/2/2015 9:04:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

AnnaLisa Kraft

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,058.35 -469.68 0.00%
S&P 500 1,913.85 -58.33 0.00%
NASD 4,636.11 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:00 PM
AXP $74.00 Down -2.72 +0.00%
American Express CAPS Rating: ****
BRK-B $130.41 Down -3.63 +0.00%
Berkshire Hathaway CAPS Rating: *****
IBM $142.68 Down -5.21 +0.00%
International Busi… CAPS Rating: ****
KO $38.75 Down -0.57 +0.00%
Coca-Cola CAPS Rating: ****
WFC $50.99 Down -2.34 +0.00%
Wells Fargo CAPS Rating: *****