If you've ever wondered why Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett garners so much attention, just pull up a long-term chart of the company and you'll have a better understanding.
In his 58-plus years as CEO, he's overseen an aggregate increase in his company's Class A shares (BRK.A) of 4,180,982% through the closing bell on July 14, 2023. On an annualized basis, as of the end of 2022, Buffett's company has doubled the total return of the broad-based S&P 500 since he took over (19.8% vs.9.9%).
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
The Oracle of Omaha's outperformance is a reflection of his investing discipline. He has an abundance of unwritten rules he abides by, such as investing for the long term, putting money to work in businesses with well-defined moats, and buying into companies with trusted management teams.
However, you might be surprised to learn that Buffett has been violating some of his core investing principles with three important stock holdings.
"Buy a wonderful company at a fair price"
Despite growth stocks leading the broader market higher for more than a decade, Warren Buffett and his investing team have remained almost exclusively focused on value stocks. As the Oracle of Omaha has previously opined, "It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price."
Although Berkshire Hathaway's portfolio is filled with a number of great businesses, one, in particular, is about as far removed from a "fair price" as it's been in more than a decade. I'm talking about Berkshire's largest holding, tech stock Apple (AAPL -0.35%).
When Buffett and his team opened a position in Apple in the first quarter of 2016, it was consistently growing its sales by a double-digit percentage. More importantly, the company was valued at between 10x and 15x forward-year earnings. This made the United States' leading smartphone provider a phenomenal value.
But things have changed drastically in 2023. Apple's iPhone 14 hasn't flown off retail shelves as quickly as expected (first-half fiscal 2023 sales for iPhone are down $5.1 billion from the comparable period last year), and Mac sales are down 30% through the first six months of the current fiscal year. Wall Street's consensus calls for sales and profits to decline by 2% to 3% this year, which includes the positive tailwind of above-average inflation.
Even with the company's growth engine completely stalled, Warren Buffett and his team have effectively been paying close to 30x current and forward-year earnings to buy additional shares of Apple. Berkshire added 20.4 million shares to its already outsized position in the March-ended quarter.
For an investor who prides himself on getting a good deal, Buffett is certainly turning a blind eye to Apple's valuation.
"I never attempt to make money on the stock market"
Warren Buffett is also no stranger to pounding the table on long-term investing. He's suggested that you should "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
A somewhat lesser-known quote on having a long-term mindset made by Buffett is:
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
While there are plenty of stocks in Berkshire Hathaway's portfolio that have some impressive tenure, such as Coca-Cola, American Express, and Moody's -- which have been respective holdings since 1988, 1993, and 2000 -- the Oracle of Omaha's foray into gaming company Activision Blizzard (ATVI) is a clear violation of Buffett's claim of never attempting to make money on the stock market.
During Berkshire Hathaway's 2022 annual shareholder meeting, Buffett told his audience of more than 30,000 shareholders and investors that his company's stake in Activision Blizzard is a merger/arbitrage play. Microsoft (MSFT 1.82%) made an all-cash offer of $95 per share to acquire Activision in January 2022, but the uncertainty of closing the deal due to possible antitrust concerns led shares of the company to trade substantially below Microsoft's offer price.
Although Buffett and his team have reduced their holdings in Activision Blizzard in three consecutive quarters (ended March 2023), they collectively purchased roughly 68.4 million shares of Activision stock in the first half of 2022 with the intent of making this a short-term arbitrage play.
To be completely fair, Buffett's short-term bet looks like it worked out. With a U.S. District Court judge tossing the Federal Trade Commission's injunction request last week, the merger looks like it's cleared its biggest hurdle. Nevertheless, this trade is in stark contrast to Buffett's typical buy-and-hold ethos.
Image source: Getty Images.
"I do not like debt and do not like to invest in companies that have too much debt"
Warren Buffett and his investing lieutenants, Todd Combs and Ted Weschler, are traditional, fundamentals-focused investors. They prefer analyzing income statements and balance sheets and aren't into taking shortcuts with charting software and other investing tools.
Considering the Oracle of Omaha's desire to buy wonderful companies at a fair price, it's not surprising that he avoids heavily indebted businesses. In Buffett's words,
I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make cash flows less predictable.
While it's sage advice, it hasn't stopped Buffett or his team from purchasing north of 224 million shares of energy stock Occidental Petroleum (OXY -0.15%) since the start of 2022. In the quarter that Berkshire Hathaway opened its position, Occidental had nearly $25.9 billion in net long-term debt, much of which came from its 2019 acquisition of Anadarko. Occidental's large debt load gives it far less flexibility than its peers in the oil and gas exploration and production space.
To boot, the Federal Reserve has undertaken its most aggressive rate-hiking cycle in four decades, which could make future refinancing pricey.
There are two guesses I can offer as to why Buffett broke one of his core investing principles and overlooked a glaring flaw in Occidental Petroleum's balance sheet. The first is the expectation that energy commodity prices would climb.
The tight global supply of oil is particularly good news for Occidental, which, despite being an integrated operator with downstream chemical plants, generates the bulk of its revenue from drilling. A sizable uptick in the spot price of crude oil would provide an outsized lift to its operating cash flow.
The other reason Buffett may have broken one of his key investing "rules" is because Berkshire Hathaway is sitting on nearly 83.9 million warrants of Occidental with an exercise price of roughly $59.62 per share. These warrants, along with $10 billion in preferred stock yielding 8% annually, were received in 2019 for the $10 billion Berkshire provided Occidental to help close its acquisition of Anadarko. Buffett would prefer Occidental's share price stay well above this exercise price.
