3 Stocks Warren Buffett Owns That You Shouldn't

Yes, the three stocks I'm about to share are all owned by Warren Buffett -- and, more importantly, I don't think they should be owned by you.

To be clear, these aren't trivial positions hiding in the corners of his Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) stock portfolio. No, together, they make up almost a quarter of it.

Is this heresy?
Studies have proven that following Buffett pays off big time. Each quarter, Buffett must tell the world all his major stock moves via Form 13F filings with the SEC. A recent study showed that investors could have crushed the market by mimicking his moves exactly. Even with the handicap of buying those stocks up to three months after Buffett.

The study covered the period from 1980 to 2006. In those 27 years, the book value of Berkshire Hathaway as a whole went down just once. Berkshire beat the S&P 500 23 out of 27 years. And on the extreme upside, Berkshire generated 40% or more in five of those years!

Given this kind of track record and given my adoration for all things Warren Buffett (yes, I've made the pilgrimage to Omaha; yes, I read all of The Snowball including many of the deep tracks footnotes), I don't warn against buying stocks he owns lightly.

In fact, I think Buffett himself would agree with me on at least two of the three stocks I'm about to warn against.

Stock No. 1: The mistake
This first stock is easy. Unlike the other two, Buffett himself has been reducing his position in this stock. Buffett used to talk in glowing terms about Moody's (NYSE: MCO  ) moat. Along with a few smaller competitors, Moody's was part of an oligopoly on providing credit ratings. Because of their designation as "Nationally Recognized Statistical Rating Organizations," you pretty much had to use one of those companies if you wanted to raise debt or create an elaborate debt-based instrument like a CDO.

The problem was that their ratings had the feel of Grandma rating my childhood art projects -- always glowing and violently at odds with reality. The financial crisis autopsy revealed a broken system with the ratings agencies at the heart of it.

Moody's and S&P still dominate the industry, but regulatory measures and a maligned reputation have damaged the moat. Yet, Moody's trades at the multiples of a healthy company. And Buffett is slowly selling his position down.

But let's be clear what I mean by mistake here. Buffett's mistake was merely not selling early enough. He got Moody's stock when it spun off from Dun & Bradstreet at around $10 a share. He lost his shot at a multi-bagger, but he's still sitting on a double with his remaining shares. And admittedly, part of the reason he's selling may be a desire to separate himself from Moody's tarnished reputation; Moody's is likely to survive and possibly even thrive. I myself would love to play contrarian on Moody's, but that would be at an earnings multiple closer to five than its current value in the teens.

Stock No. 2: The blue chip bargain that's no bargain
Coca-Cola
(NYSE: KO  ) is the prototypical Buffett stock. Huge sustainable moat. Virtually no reliance on technology. A business model simple enough that a held-back kindergartner would understand it. And so easy to operate "a ham sandwich could run [it]."

This is the kind of great company you want to get in at a good price. Well, Buffett did. More than 20 years ago. Actually, he got in at a great price, seeing his investment grow almost 10-fold. And that's a gain gotten while sleeping easily at night -- talks of the health dangers of sugary drinks aside, the duopoly Coke and Pepsi (NYSE: PEP  ) enjoy isn't likely to suffer a scandal like the one Moody's and S&P are dealing with.

Although Coca-Cola is down about a third from its all-time highs (somewhat ironically, the tech bubble carbonated the shares of Coke), it trades at a reasonable to slightly rich price these days. Once you factor in the low risk profile, I can't fault anyone for continuing to hold Coke today. But if you're looking for a new investment to handily beat the market, there are better opportunities out there. (Hint: keep reading).

Stock No. 3: When a moat evaporates
We just talked about Coca-Cola's imperviousness to technological obsolescence -- after all, you can't digitize food or drink.

Buffett wishes he could say the same about newspapers. Buffett grew up delivering newspapers in the early morning. As he daydreamed during his daily manual labor, even his precocious brain couldn't have envisioned the Internet that would threaten the core businesses of the Buffalo News (a subsidiary of Berkshire Hathaway) and the Washington Post (NYSE: WPO  ) (a significant stock holding).

Why doesn't Buffett sell? For the Washington Post, the decision is complicated by history and personal ties. But the Post has the saving grace of diversification -- both its cable television division and its Kaplan educational division are consistently profitable. As for the Buffalo News, it's important as a symbol to potential Berkshire acquisition targets. One of the reasons he gets such good deals on companies he purchases outright is his reputation for buying for the long run. For being hands-off and sticking with a business unless it becomes so bad that there really is no other course (see the Berkshire Hathaway textile mills for such a case).

That said, he said specifically about the Buffalo News that his continued ownership is "not totally rational." About the industry as a whole, he notes that "the math is really tough." In other words, the newspaper business isn't the indomitable cash cow it once was. No, even meager profitability is an accomplishment now.

Buffett has his reasons for being in the newspaper industry, but the rest of us should steer clear of any pure play newspapers that aren't at death's-door prices.

One stock Buffett owns that you should too
With these three examples, I hope it's clear that just because Warren Buffett owns something, you shouldn't blindly buy in. He may have gotten in at a much better price than you, he may have just been wrong on a stock (he is human after all), and he may have different goals than you. Plus, there's a big difference between Buffett continuing to hold a long-held position and him buying new shares.

So those caveats aside, I am very interested when Buffett makes a new move. I may not follow Buffett blindly, but you can bet your bottom dollar I follow him closely, hoping for coattail ideas.

So let me leave you with one recent move he's made that could be a great opportunity. During the financial crisis, Buffett had sold a good chunk of his Johnson & Johnson (NYSE: JNJ  ) stock to take advantage of better opportunities. But in the second quarter, with J&J falling a bit on recent product recalls, he increased his still-sizable position by 73%! Classic move by Buffett ... getting in on another great company at a good price (between $58 and $66 a share). J&J stock is still within that range today.

If you want one more Buffett health care pick, click here to get The Motley Fool's 3-page free report: The "Risky" Health-Care Company Warren Buffett Is Quietly Buying.

Anand Chokkavelu owns shares of Berkshire Hathaway. Berkshire Hathaway, Coca-Cola, and Moody's are Motley Fool Inside Value recommendations. Berkshire Hathaway and Moody's are Motley Fool Stock Advisor picks. Johnson & Johnson, Coca-Cola, and PepsiCo are Motley Fool Income Investor selections. Motley Fool Options has recommended diagonal call positions on Johnson & Johnson and PepsiCo and writing covered calls on Moody's. The Fool owns shares of Berkshire Hathaway, Coca-Cola, and Johnson & Johnson. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (76)

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.

  • Report this Comment On October 18, 2010, at 12:31 PM, TheDumbMoney wrote:

    Your title implies you should not own any of these stocks. That is of course misleading, as well as wrong. You sort of explain in the text, but I would highlight it: Moody's and Washington Post are "Sell, and you were dumb for buying shares of these any time in the last five or so years" stocks. Coke is a "Hold, but now is maybe not a terrific time to buy more" stock. It has taken a lot of time for Coke to work off the fizz of late-nineties share-appraisal insanity, but there have been (late 2004, 2006, early 2009) and will be more reasonable buying opportunities for Coke, and one should look for them. That's a pretty enormous distinction from the Post and from Moody's. Also, aside from politics and personal reasons, Berkshire's gain in Post stock since the 70's dwarfs the 10x gain on KO stock since the late 80's, is my memory of it (maybe faulty). That's a lot of tax liability if there is ever a sale..., and, when you're up that far, a ten, twenty, thirty percent decline are sort of a shrug-worthy events, particularly given the Post's non-newspaper businesses, which you do highlight. But don't forget the taxes.

  • Report this Comment On October 18, 2010, at 12:51 PM, TMFBomb wrote:

    @dumberthanafool,

    Good comment.

    For Coke, I'm making the distinction between buying new shares and holding. I don't think buying Coca-Cola is a terrible move today (I personally would want a share price dip before buying in), but I think there are better opportunities out there.

    -Anand

  • Report this Comment On October 18, 2010, at 4:43 PM, susan400 wrote:

    Nothing personal but why do you think you can out think WB? And he has sold positions only to see the stk fly multifold. Moody's ? industry has great edge, anyone who thinks raters are going to pre-warn you haven't been around a credit cycle. Moody’s was flogged, people using it to blame for their own errors. Likely earnings will recover and Moody’s edge goes on Additionally it isn’t just a rater.

    KO, why do you think you can out judge? KO has great edge, HUGE and next inflation cycle/ like those past, its earnings will jet higher.

    Wash post- newspaper cos that transition will still have great edge. There will be fewer, NYT will go under, Wash Post will be left in ideal position. Wash post isn’t just a newspaper either, .

    Susan400

  • Report this Comment On October 18, 2010, at 4:55 PM, junaidfarooq wrote:

    WB is not God but he is very close to being an investment prophet. I have just a few questions for you, how long have you been managing money and what has been your track record and why should I listen to you and not to one of the most successfull investor in recorded human history?

  • Report this Comment On October 18, 2010, at 5:15 PM, TMFBomb wrote:

    @susan400,

    See my answer to junaidfarooq below.

    @junaidfarooq,

    I am not denigrating Buffett or his track record (in fact, I'm a big fan of his)...I am merely pointing out that just looking at his current portfolio and blindly buying may not serve individuals well...for all the reasons stated above.

    Fool on,

    Anand

  • Report this Comment On October 18, 2010, at 5:23 PM, BioBat wrote:

    KO may be trading high today but that's because it's seen a 20% run over the past 2 months. You could do a lot worse than a stock that currently has a dividend of 3% and has consistently raised it over decades and has a virtually untouchable moat. It's essentially trading at a level that makes it more attractive than a savings account. It's safe, it pays out, and over time is likely to creep up a bit.

    JNJ is more attractively priced, well diversified and the 3.4% dividend is nothing to dismiss.

  • Report this Comment On October 18, 2010, at 5:50 PM, langco1 wrote:

    lets not forget another beauty buffett is trying to quietly unload..kraft foods (kft)...this companys brain dead ceo paid 20 BILLION of stockholders money to buy candury a nothing candy company....

  • Report this Comment On October 18, 2010, at 8:39 PM, goalie37 wrote:

    The stock I was hoping to see on your list is Wells Fargo (WFC). If Buffett claimed that tech was something to be avoided because it couldn't be understood, then I don't understand the case for this company either.

  • Report this Comment On October 18, 2010, at 10:26 PM, DBrown7 wrote:

    Buffett understands financial companies very well. He has stated in the last 18 months that he would buy all of Wells Fargo if he could. Berkshire can't own more than 10% of WFC without coming under the restrictions of a bank holding company. It is the only reason Buffett has not increased the Berkshire position in WFC.

  • Report this Comment On October 19, 2010, at 3:05 AM, mikecart1 wrote:

    Nearly Buffet's entire portfolio is garbage these days. The only things he owns that are good are things you can't buy like GEICO and Burlington.

  • Report this Comment On October 19, 2010, at 8:50 AM, TMFBomb wrote:

    @goalie37 and DBrown7,

    Of the big banks, Wells is the most easily understood...and Buffett knows it well. He bought additional shares during the financial crisis at extremely favorable prices.

    I personally think there's a bigger opportunity in smaller banks, but the size of Berkshire precludes Buffett investing in those.

    -Anand

  • Report this Comment On October 19, 2010, at 8:50 AM, howboutme wrote:

    Small time investors shouldn't bother themselves with Warren Buffett moves. I keep telling you guys that Buffett started his company along time ago, buying up low priced stocks at the right time with a lot of free cash flow. Something most of us don't have.

    He still does this today....buying stock prices he can manipulate with a huge purchase. How are we suppose to make money off of our little purchase,......its not going to happen that way for us. Buffett has even admitted that now he is stuck at where he is and cannot make it the way he started out. All he can do now is manipulate the purchase and buy BIG.

    Any small time investor will need to duplicate his original moves, before it grew into something. Find the right stock, buy with a big purchase, repeat the process for the first 10 years, watch it grow and then look at your 30 year result.

    Any other talk about Buffett is heresay for the small investor.

  • Report this Comment On October 19, 2010, at 10:30 AM, wrongdog wrote:

    USG?

  • Report this Comment On October 20, 2010, at 3:49 AM, esxokm wrote:

    I love KO. It's current dividend yield isn't bad (although it was a little better when it was trading at 3% not long ago; without checking, it might be 2.8% or thereabouts now), and it is great for dollar cost averaging. So long as the dividend keeps going up every year, and the potential for a solid effective yield down the line exists, I would say that KO is a great investment.

  • Report this Comment On October 22, 2010, at 12:09 PM, apismellifera wrote:

    @wrongdog-- Yeah, USG is an even better example. If my memory serves me. Buffett bought a boatload as it was emerging from bankruptcy (asbestos claims). Still has quite a moat, economies of scale, a killer brand, etc.

    Stupidly, I bought some once, but at a much higher price, and it's since tanked. Same stock, but two very different effects on our portfolios! It's all about the purchase price.

  • Report this Comment On October 22, 2010, at 12:40 PM, madmilker wrote:

    you left out Wal*Mart.

    on Wal*Mart's China web page!

    "Wal-Mart China persists in local procurement which provides more job opportunities, supports local manufacture industry and promotes local economy. So far, 95% of merchandising sold at Wal-Mart China store are local products by which Wal-Mart has established business relations with nearly 20,000 suppliers. At Wal-Mart, we treat suppliers as partners and would like to develop with them. In 2008 Wal-Mart won the Supplier Satisfaction published by Business Information of Shanghai for five consecutive years."

    5% foreign in China...

    That doesn't support American exports and American jobs.

    Remember what Lance Winslow wrote in that article "The Flow of Trade in a Global Economy"....

    "Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what's in the best interests, and we should make sure that trade is not only free, but fair too."

    Think for a moment about George Washington....yes the man that is on the US dollar bill....How do you think George feels being sent overseas in return for all that foreign so-call cheap items and being left in a foreign bank because the American worker doesn't make anything for the foreigners to buy. Cheap items didn't make this great union of 50 states the greatest place on the face of this Earth.....the American worker (union and non-union) did.

    You can't have a strong country without having a strong currency and you can't have a strong currency unless you keep it floating around within your 50 states. This is why the store with the star in the name puts 95% China made items in their stores in China....to keep their "yuan" in their country helping the nice people there. And with only 5% left for all the other 182 country's that make stuff including the United States of America....that doesn't produce very many jobs outside of China.

    Being an old person myself and knowing how it was back in the 40's, 50's and 60's in this union of 50 states....I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches just maybe one day he will shake mine again.

    Fifteen cargo ships pollute as much as 760 million automobiles.

    $9 billion a year in hidden taxes to all American taxpayers to clean fish from ballast tanks of ships...

    think about all those facts the next time you pull that George out of your pocket....

    Retail makes NOTHING...

    Governments only make MORE DEBT...

    It's time for less of those two and for America to get back to what it does best....MAKE STUFF..

    cause George Washington on that dollar can't help anyone in the United States of America if he is being held in a foreign hand.

    Made In America is the only way out of this mess cause foreign made put US here.

  • Report this Comment On October 22, 2010, at 3:55 PM, mustang28027 wrote:

    What about GE??? Remember, he bought $7 BILLION at a preferred rate of return of 10%... think the average man is getting that?

  • Report this Comment On October 23, 2010, at 3:32 PM, bruhed wrote:

    Interesting (if not contradictory) take. Thank you.

    But I am very surprised (and a bit disappointed) that you neglected to mention the ongoing and extremely damaging for-profit school scandal regarding Kaplan U for the Post stock, which would be another reason for avoiding it.

    As a fellow writer, tho, I usually blame the editor. :-)

    Best,

    Mike

  • Report this Comment On October 25, 2010, at 10:53 PM, TMFBomb wrote:

    @bruhed,

    Yup, agreed...I was focusing on the newspaper aspect, but that's another reason the Post has worries.

    -Anand

Add your comment.

DocumentId: 1335276, ~/Articles/ArticleHandler.aspx, 7/28/2014 1:35:38 PM

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...


Advertisement