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2 Ways Buffett's Investing Strategy Has Changed Dramatically Since the Dot-Com Bubble

By Sean Williams - Feb 11, 2020 at 6:06AM

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Buffett may be known for his buy-and-hold ethos, but Berkshire Hathaway's portfolio has undergone some serious changes since the early 2000s.

Warren Buffett, the CEO of Berkshire Hathaway (BRK.A -0.16%)(BRK.B -0.34%), is widely regarded as one of the greatest investing minds of our time. Since the mid-1950s, Buffett has seen his net worth grow from about $10,000 to a cool $90 billion. Keep in mind that this figure fails to account for the tens of billions the Oracle of Omaha has generously given to charitable organizations through the years, which otherwise may have allowed him to make a run at Amazon.com CEO Jeff Bezos as the richest person in the world.

Buffett's investing prowess has persuaded a lot of investors to mirror his trades, or at the very least pay close attention to what he's been buying and selling in Berkshire Hathaway's portfolio. Yet what's most intriguing about Buffett's investing strategy is that it's relatively simple, and virtually anyone can mirror it. Rather than leaning on copious amounts of software and technical data, Buffett has instead chosen to focus his attention on a small number of sectors. He then looks for businesses that possess perceived-to-be long-term competitive advantages and buys them with the intent of holding for a very long period of time.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.

While the ethos of the buy-and-hold strategy never changes for the Oracle of Omaha, how he invests Berkshire Hathaway's capital certainly has over time. Since the dot-com bubble burst, nearly two decades ago, we've seen two very noticeable changes to Buffett's portfolio make-up.

Buffett's portfolio has undergone two major changes since the dot-com bubble burst

For those of you who may not remember, the dot-com bubble was perhaps a once-in-a-lifetime event. It was seemingly a time when stock tips from your cab driver returned 100% overnight, and initial public offerings doubled, tripled, or even quadrupled upon their debut. It was especially prominent for the technology- and biotech-heavy Nasdaq Composite, which quadrupled in value over a four-year period.

Then it all came crashing down.

At its peak in December 1999, the Shiller price-to-earnings ratio, a P/E ratio based on average inflation-adjusted earnings from the previous 10 years, hit 44, marking its highest point in history (and still to this point). Not long thereafter, the stock market would begin a precipitous decline. The 929 days it took for the benchmark S&P 500 to go from peak to trough marks the longest such correction in the market dating back more 70 years. As you can imagine, such a massive push lower in equities, coupled with sky-high valuations leading up to this extended bear market, had Buffett investing a lot differently than he does today.

A person using a pin to pop a bubble with a dollar sign inside of it.

Image source: Getty Images.

Consumer staples, once a core component, are no longer

Perhaps the most notable long-term shift for the Oracle of Omaha has been the somewhat steady decline in consumer staple stocks as a percentage of invested assets. Consumer staples are essential products that consumers buy, such as food, drinks, hygiene products, and household goods.

If you think about the logic behind this shift, it makes sense. As of mid-2002, Berkshire Hathaway had 47.1% of invested assets devoted to consumer staples. Considering that the stock market was in free fall, buying heavily into businesses that supply products consumers are going to buy regardless of how well or poorly the U.S. and global economy are performing is a safe strategy. Furthermore, given that most brand-name consumer staple companies have profitable, time-tested businesses, as well as excellent pricing power, they're perfect for collecting a market-topping dividend. 

However, we've seen a very substantial decline in consumer staples allocation since the end of the Great Recession. As of the end of the third quarter of 2019, this sector comprised only 15% of Berkshire Hathaway's portfolio, which marks the lowest level in at least 19 years based on the data WhaleWisdom.com provides.

Why the decline? Well, it's not for having lost faith in Coca-Cola (KO 0.36%). The beverage maker continues to be Buffett's longest-tenured holding, and with $640 million in net income from dividends alone expected in 2020 from Coke, I don't foresee the Oracle of Omaha parting ways. Plus, having a presence in all but one country worldwide certainly helps Coca-Cola hedge its growth.

Two friends clanking their Coca-Cola bottles together while chatting outside.

Image source: Coca-Cola.

The real reason for this shift looks to be declining global interest rates. While lower lending rates have allowed the likes of Coca-Cola to increase its leverage in order to spur top-line growth, historically low lending rates have been far more conducive to growth stocks. The ability to borrow at a low cost has led to hiring, expansion, and plenty of merger and acquisition activity over the past decade. As you'll see in a moment, this has made the generally higher P/E ratios of consumer staples (coupled with tamer growth rates) less attractive, all while making higher-growth industries more intriguing to Buffett.

Technology is now in

The other major change we've seen is how Buffett approaches the information technology sector. Dating back to the dot-com bubble, information technology made up somewhere between 1% and 2% of Berkshire Hathaway's portfolio, when rounded. When the dot-com bubble burst, Buffett wasn't exactly a big fan of tech stocks, nor was it an industry that he particularly followed all that closely.

However, this has changed pretty dramatically over the past 18 years. As of the end of September 2019, Berkshire Hathaway had 26% of its invested assets allocated to information technology, making it the second most important sector behind only financials, Buffett's bread-and-butter sector.

Buffett has probably found two reasons to get more aggressive with brand-name tech stocks. First, there's those aforementioned lower lending rates. As interest rates push lower, it encourages higher-growth tech companies to use leverage to their advantage, which can, in turn, boost growth rates even more. This is a big reason growth stocks have been outperforming value stocks over the past decade.

The other factor at work here might be external pressure from investors. Although Berkshire Hathaway has a history of market-topping returns (at least in terms of book value growth, relative to the S&P 500), Buffett's returns over the past decade haven't outpaced the market as in year's past. This may have helped moved Buffett's hand toward the traditionally higher-growth sector.

Two smiling children playing with iPhones in an Apple store.

Image source: Apple.

Initially, Buffett bought into IBM (IBM 1.07%). The Oracle of Omaha was banking on IBM to once again reinvent itself through its cloud-computing technology and blockchain services. However, Buffett (and Wall Street) underestimated just how badly IBM's legacy sales would weigh on its top-line. It also didn't help that IBM was late to the game in pushing for cloud services. Though IBM somewhat recently completed an acquisition of Red Hat to enhance its cloud offerings, Buffett exited IBM for good in early 2018.

The real tech play here is Apple (AAPL -1.07%), which is far and away Berkshire Hathaway's largest holding. The aforementioned 26% allocation to information technology is all Apple.

For Buffett, Apple checks all of the appropriate boxes. It has virtually unparalleled branding power, a competitive advantage in smartphone market share in the U.S., and is an innovative leader, as shown by the superior growth of its wearables and services segments in recent quarters. Apple has also done an excellent job of returning capital to shareholders through share repurchases and its dividend, both of which have Buffett's full support.

We'll have our next chance to see how Buffett's portfolio has changed later this week, when 13F filings are filed with the Securities and Exchange Commission. Wall Street and investors will certainly be eyeing that event, and you should, as well.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$464,250.00 (-0.16%) $-761.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$309.29 (-0.34%) $-1.07
Apple Inc. Stock Quote
Apple Inc.
AAPL
$145.54 (-1.07%) $-1.57
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$135.03 (1.07%) $1.43
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$65.96 (0.36%) $0.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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