Buffett Stocks: Investing Essentials

Photo: Warren Buffett at the Berkshire Hathaway annual meeting in May 2014.

Stocks and Warren Buffett are almost synonymous with each other. Warren Buffett buys stocks through Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , and much can be learned by simply sitting down and studying Buffett and the endless number of tips and insight he has happily shared through the years.

Yet for those investors taking a first glance into possibly investing in what Buffett buys, there are a number of critical things that are necessary to know.

What are Buffett Stocks?

To start, what we like to call "Buffett Stocks," are those held by Berkshire Hathaway, Buffett's company. Each and every quarter, Berkshire Hathaway files what is known as a 13F with the SEC. This discloses exactly what its stock positions were at the end of every three months.

In addition, since the SEC filings only reveal the holdings of American companies, we're also given a clear picture of Berkshire's fifteen largest holdings -- which at last count included three headquartered outside of the U.S. -- in its annual report.

And at times, Berkshire Hathaway will also own what is known as "preferred stock" or "warrants" in a number of companies as well. It is similar to common stock, yet it often has critical differences like higher dividends or specialty clauses to transfer the holdings into common stock at price that has already been agreed to.

All of this adds up to the massive positions -- which at last count stood at nearly $120 billion -- held on Berkshire Hathaway's books in known as its "investments in equity securities."

What is the history of Buffett Stocks?

Here's where the fun begins. You could say Buffett's history began when he bought his first stock as an 11 year old. But for the purposes of this, we'll start 25 years later when Berkshire Hathaway acquired National Indemnity Insurance in 1967.

In short, Buffett has used the insurance businesses Berkshire Hathaway controls to make investments in other companies, whether buying them outright, or for the purposes of investing in their stock.

Without diving too far into the details, every insurance company has what is known as a "float." This is the money they receive upfront in premiums, but likely won't have to pay out for years, or maybe even decades depending on the type of insurance. But in the meantime, insurers are able to invest it as they please.

This business model has been one of the driving machines of the massive investments Buffett has made through the years. When the insurance business expands, so too does its float. And expand is an understatement:

Year

Float
(in $millions)

Per-Share Investments

1970

$39

$66

1980

$237

$754

1990

$1,632

$7,798

2000

$27,871

$50,229

2010

$65,832

$94,730

2013

$77,240

$129,253

Source: Company Annual Report.

With that being the "how" part of the history, it's also important to address the "when." And "history" is an appropriate word to describe the stocks Buffett buys.

Buffett is a key proponent of buy-and-hold investing, as he himself said in 2003:

We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody's in 2000. Brokers don't love us.

Although he's continually added to his stake in Wells Fargo, it's important to see the investments Buffett made in Coca-Cola, American Express, and Moody's still remain. And Gillette likely would too if it wasn't purchased by Procter & Gamble -- which Berkshire also still owns.

The positions in those four businesses only cost Berkshire Hathaway $3.2 billion, but at last count, they were worth $36.5 billion. The beauty of buy-and-hold is on full display.

Source: Coca-Cola.

Lastly it's also important to note as it relates to the history of Buffett Stocks, Buffett has slowly given more control to Todd Combs and Ted Weschler, who now control stock portfolios worth upwards of $7 billion. 

This is why Buffett himself said in 2011, "When our quarterly filings report relatively small holdings, these are not likely to be buys I made (though the media often overlook that point) but rather holdings denoting purchases by Todd or Ted."

But knowing Buffett said, "both men have Berkshire blood in their veins," although some of the stocks held by Berkshire may not be from Buffett by name, they undoubtedly are at heart.

How many Buffett Stocks are there?

Generally speaking, there are about 50 companies held in the Berkshire Hathaway portfolio ranging from one position worth less than half a million at the time of writing, to the Wells Fargo holding which is worth a staggering $25.4 billion.

Buffett has what he affectionately calls his "Big Four" -- which as you would suspect include Wells Fargo, American Express, Coca-Cola, and recently purchased IBM. At last count, they had a value of nearly $70 billion, which represented roughly 60% of the portfolio.

And in total, the 15 biggest positions represented nearly 90% of what Berkshire Hathaway held.

All of this is to say, the stocks Buffett really clings to are relatively small in number.

Why use Buffett Stocks?

Put simply, Buffett has done a remarkable job at destroying the typical returns seen by investors everywhere. A paper written by two analysts at AQR Capital Management, a hedge fund, and an NYU Professor which reviewed all of Buffett's efforts in the stock market noted in 2012:

Buffett's returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks.

In other words, keep an eye on what he's done and you'll be glad you did.


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