When it comes to successful long-term investors, Warren Buffett, CEO of Berkshire Hathaway (BRK.A 0.32%) (BRK.B 0.41%), is arguably in a class of his own. Since the 1950s, the Oracle of Omaha has grown a $10,000 seed investment into a net worth of roughly $80 billion. And this doesn't factor in the tens of billions he's generously donated to charity over the past 15 years.
Warren Buffett has also been quite adept at making money for his company's shareholders. Over the past 55 years, Berkshire's per-share market return has averaged 20.3% each year, leading to an aggregate gain of 2,744,062%. By comparison, the S&P 500 is up 19,784% over the past 55 years, inclusive of dividends paid.
Buffett has a knack for trouncing the broader market, which is why Wall Street and investors tend to wait on the edge of their seats when form 13F is filed with the Securities and Exchange Commission roughly 45 days after the end of a quarter.
A 13F provides a snapshot of what money managers with more than $100 million in assets under management were holding, as of the end of the recent quarter. In this instance, it offers an inside look at what Buffett and his team were buying and selling during the second quarter.
As noted, Buffett has been a big-time seller of equities throughout 2020. But amid the chaos and uncertainty of the coronavirus pandemic, he has made three big purchases. Since the year began, Buffett and his team have put between $563 million and $6.8 billion to work in the following three stocks (or as I like to call them, the "three B's").
Bank of America
After obtaining permission in April from the Federal Reserve Bank of Richmond to increase Berkshire's ownership stake in BofA past the usual 10% limit for investment companies, Buffett has taken advantage by building Berkshire's stake to nearly 12% of the bank's outstanding shares. In total, approximately $2.1 billion has been invested in BofA stock within the past couple of weeks.
Why Bank of America? The simple answer is that it's a money machine and has cleaned up its act. We're more than a decade past the trough of the financial crisis, and BofA has put mortgage settlements and the awful credit quality of its loan portfolio to bed. Today, it is well capitalized and has been returning boatloads of capital to shareholders during periods of strong economic expansion. Had COVID-19 not gotten in the way, Bank of America was set to return $37 billion in cash plus buybacks to its shareholders between July 2019 and June 2020.
The bank also deserves credit for reining in costs by focusing on digital banking and mobile apps. With more of the company's customers conducting their business online, fewer physical branches have been needed, which has helped to reduce noninterest expenses.
But what might intrigue Buffett the most is BofA's interest sensitivity. It's arguably the most interest-sensitive money-center bank on Wall Street, and rates have nowhere to go but up over the long run. When the Federal Reserve does begin raising rates in (presumably) 2023, Bank of America should be the biggest beneficiary.
It's a pretty crazy statement considering the harsh words that Buffett has had regarding the metal during his tenure as CEO. He's described gold as having "no utility," and has frequently harped on its inability to create anything. In Buffett's view, gold simply sits there, eating up storage space and other fees. Yet, $563.6 million worth of gold-mining stock now sits in Berkshire Hathaway's portfolio.
If you ask me, this 20.92-million-share purchase has all the hallmarks of a Todd Combs or Ted Weschler investment. Buffett isn't a fan of mining stocks, nor does he have the mindset to research the industry. Combs and Weschler, Buffett's investment lieutenants, have the ability to make investments at their discretion when they see value.
On a macro level, this looks like a smart move. Gold should have plenty of upside over the next 12 to 24 months as the Federal Reserve continues with its quantitative easing policies and balloons the money supply, ultimately hurting the U.S. dollar. Also, with global and U.S. bond yields generating meager or negative nominal returns, gold is looking like a preferred store of value.
More specific to Barrick Gold, which is one of the two largest publicly traded gold-mining stocks, everything is clicking. Net debt declined by almost 25% in the most recent quarter to $1.4 billion, while higher realized selling prices pushed operating cash flow past $1 billion for the three-month period. Based on its gold-focused all-in sustaining cost of $1,031 an ounce in the second quarter, Barrick has a cushy cash operating margin of more than $900 an ounce at the moment. Simply put, if gold bases or moves even higher, Barrick Gold is in great shape.
However, the one stock that Warren Buffett simply can't get enough of in 2020 is that of his own company.
According to the company's quarterly filings, some $1.7 billion and $5.1 billion in Berkshire stock were repurchased during the first and second quarters, respectively. That's $6.8 billion spent on share repurchases in 2020, which is more than Buffett has spent buying equities this entire year!
Why rebuy so much of his own company's stock? For one, Berkshire Hathaway's own rules that allow Buffett to repurchase stock only changed two years ago. Prior to this change, neither he nor his right-hand man Charlie Munger could rebuy any of Berkshire's stock unless it dropped below 120% of book value.
The new rules allow Buffett and Munger to go shopping if Berkshire has at least $20 billion in cash in its coffers, and the two agree that the company is trading at a sizable discount to its intrinsic value. In other words, Berkshire Hathaway's swelling cash hoard coupled with years of inactivity might be coercing Buffett to play catch-up on the repurchase front.
Another reason Berkshire's stock is probably attractive to Buffett is because it was valued at its lowest price-to-book in eight years during the swoon in equities during the first and second quarters. Buffett loves a bargain, and there's not a company he knows better than his own.
Also, don't overlook Buffett's confidence in the American economy. Berkshire Hathaway's investment portfolio, and its more than five-dozen owned subsidiaries, have strong cyclical tie-ins to the U.S. economy. Rebuying Berkshire's stock is pretty much a bet on the long-term growth of America.