This Massive Hedge Fund Company Sold Warren Buffett's Company. Should You Buy?

There are lots of reasons to consider buying into Berkshire Hathaway.

Aug 25, 2014 at 6:45PM

Photo: Ron Reiring via Flickr.

We should never blindly copy any investor's moves, no matter how famous or successful the investor. Still, it can be useful to keep an eye on what smart folks are doing. 13F forms can be great places to find intriguing candidates for our portfolios.

For example, a glance at the latest quarterly 13F filing of Bridgewater Associates shows us that as of the end of June, the company has sold out of its position in Warren Buffett's company, Berkshire Hathaway (NYSE:BRK-B), unloading more than 90,000 shares that would be worth more than $12 million today.

Why pay attention to Bridgewater Associates?
If you're wondering why you should care what Bridgewater Associates is doing, know that it's one of the world's largest hedge fund companies -- and in 2010 and 2011 it ran the best-performing hedge fund. Bridgewater was founded by billionaire Ray Dalio, who focuses on macroeconomic factors as he makes his investment decisions -- factors such as inflation, currency exchange rates, and GDP growth. He's clearly rather skilled, as the $13.3 billion size of Bridgewater attests.

Why sell Berkshire Hathaway?
The folks at Bridgewater didn't spell out why they sold their shares, but it's worth noting that although it was the biggest closed-out position in the quarter, the holding was still minor, worth about 0.1% of the portfolio. Bridgewater actually keeps most of its money in a few ETFs, with 35% of its reportable stock portfolio value in the Vanguard Emerging Markets Stock ETF (NYSEMKT:VWO), 28% in the S&P 500 SDPR ETF (NYSEMKT:SPY), and 24% in the iShares MSCI Emerging Markets Index ETF (NYSEMKT:EEM), for a total of 88%. These ETFs offer instant diversification across both the U.S. stock market and faster-growing developing economies.

Still, it's worth asking why anyone might sell shares of Berkshire Hathaway. One reason is Buffett himself, as the Berkshire CEO turns 84 this year. It's reasonable to be nervous if an octogenarian is overseeing a chunk of your nest egg. However, Buffett has paid a lot of attention to succession planning, aiming to keep the company's culture alive. And he has some strong investing lieutenants in Ted Weschler and Todd Combs: They both outperformed the S&P 500 in 2013, a year in which it gained more than 30%, and they've outperformed Buffett, too. Buffett has also asked his board of directors to intervene if he ever shows signs of deterioration.

Another argument is that the company is so big that it can't grow briskly anymore. That's true, to a degree. Glance at almost 40 years of growth in Berkshire's book value per share, and you'll see that the past decade has featured no year with growth of 20% or more, while the '70s, '80s, and '90s saw many years featuring growth of more than 30% and even 40%. Still, seven of the last 10 years did sport double-digit gains, and the company's stock has averaged annual growth of 15% over the past five years. One could do much worse.

Why buy Berkshire Hathaway?
There are plenty of reasons to own shares of Berkshire Hathaway. For one thing, although it's primarily a massive insurance company, it's also a well-diversified conglomerate: It owns many businesses in their entirety, including GEICO, Benjamin Moore, Dairy Queen, Justin Brands, Fruit of the Loom, and BNSF, one of the nation's biggest railroad companies. It also owns shares in many others.

It's a compelling collection of companies, because many of them are defensive in nature; no matter what the economy is doing, people will keep buying insurance, electricity, and underwear. And when the economy is really cooking, that will boost business for BNSF, Berkshire's jewelry companies, and its many home-related businesses, which offer bricks, flooring, insulation, furniture, realtor services, and manufactured homes.

Berkshire's business model is a thing of beauty. Its businesses generate lots of cash that piles up and can be invested in the businesses that need it most. The company recently sported $55.5 billion in cash and has spent almost $5 billion on capital expenditures for Berkshire Hathaway Energy and the BNSF Railway. Better still, its cash pile will also permit Berkshire to keep adding more big companies to its collection over time.

Finally, Berkshire Hathaway's stock, despite its many decades of growth, is still seen as undervalued by plenty of investors. Further, Buffett has said that if the stock falls significantly, he's ready to repurchase shares, which is a shareholder-friendly move when a stock is undervalued.

If you don't think you're likely to be one of the world's best investors, consider investing with one. Bridgewater Associates may have sold Berkshire Hathaway, but hedge funds buy and sell stocks for many reasons that may or may not matter to the individual investor, and Berkshire's prospects are still looking bright.

Warren Buffett: Learn which new technology he sees as a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Selena Maranjian owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. 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.

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