Charlie Munger, the Vice Chairman of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) and longtime investing partner of Warren Buffett, is known for frequently quoting the 19th century mathematician, Carl Gustav Jacob Jacobi:
"Invert, always invert."
Munger argues that solving a problem often requires one to look at it from a counter perspective. If you're aiming to sell a product, it can be helpful to ask, "How would I get people to not buy my product."
With this "inversion" in mind, we asked five Fools to look at Berkshire Hathway's portfolio of stocks and tell us which company they would avoid buying -- rather than the typical question "Which Buffett stock would you buy?"
I'm not somebody who thinks Wal-Mart is doomed. At the same time, I do believe its best days are behind it.
GM's stock does have significant upside potential, but it's just too risky right now for my taste.
We still don't know the full effect and legal implications of the vehicle recalls, which seem to get bigger and bigger. After the latest round of recalls announced June 16, GM has recalled more than 16 million vehicles this year alone, more than the amount of new cars the company is expected to sell this year in the U.S. A recent report ties GM's faulty ignition switches to 74 deaths, while GM only claims responsibility for 13, so there is still a lot of potential for legal backlash.
Aside from the impossible-to-quantify eventual legal fallout, GM simply doesn't have the "wide moat" Buffett normally looks for in stocks. That is, there is nothing to give GM a distinct competitive advantage over rivals like Ford, Nissan, Toyota, and others. The auto industry itself could face challenges over time as fuel costs rise and technology evolves.
I love General Motors' products and actually own a GM car (which was just recalled), but the risk-reward just doesn't make sense, in my opinion.
Kingkarn Amjareon: Like Matt, I'm avoiding General Motors.
General Motors is one of the three largest auto manufacturers in the United States and, from a valuation point of view, does make an attractive value proposition.
However, General Motors' recall disaster poses serious bottom line risks for the company. With the recalls rolling in worldwide for a variety of safety issues, General Motors faces not only recall costs in the billions, but also painful fines or an expensive settlement with an increasingly hard-charging Department of Justice which could put short-term selling pressure on General Motor's stock price.
In addition, General Motors has suffered significant brand damage due to a series of highly publicized safety-related recalls which could hurt GM's topline growth and market share in the coming years.
Patrick Morris: I'm on the same page regarding Wal-Mart and GM, but I'd also add Starz (NASDAQ: STRZA) to the companies I'd avoid.
While it trades at a very reasonable 12 times forward price-to-earnings multiple, the business scares me. With people being willing to cut ties to their cable companies -- whom Starz depends on for profits -- its long-term "moat" and future seems incredibly uncertain.
In 1991, Buffett said; "most media properties continue to have far better economic characteristics than those possessed by the average American business. But gone are the days of bullet-proof franchises and cornucopian economics."
Considering the Berkshire Hathaway position in Starz has been reduced by more than 90% from $652 million at the end of 2012 to just $62 million at last count, one has to think Buffett believes it isn't just "bullet-proof franchises and cornucopian economics," but perhaps all economics which are now gone for media companies like Starz.
Sure, Coca-Cola will continue to grow and perform adequately, but the days of real fizz are long behind this sugar-water server.
Soda sales just don't have the pop they used to in the U.S., and while Coke still has excellent opportunities abroad and an enviable distribution network that allows it to capitalize on wherever consumers' drink tastes lead, the company is just too large to have the oomph that I'd want in my portfolio.
It's a problem shared by many of the positions in Berkshire's portfolio. Of course, the government is floating Buffett billions in cash via deferred capital gains taxes, so it makes plenty of sense why he wouldn't want to sell.
But for new investors, why buy Coke with expected long-term high single digit returns at best? I know quite a few places to receive 15-20% annual returns, so most of the large, long-tenured stocks in Berkshire's portfolio are not for me, anyway.
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Jim Royal, John Maxfield, Kingkarn Amjaroen, Matthew Frankel have no position in any stocks mentioned. Patrick Morris owns shares of Berkshire Hathaway and Coca-Cola. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, and General Motors. The Motley Fool owns shares of Berkshire Hathaway and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.