Every quarter, large money-managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always follow what the big money does, we can often glean an idea or two by tracing their footsteps.
Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) CEO Warren Buffett's most notable investment this past quarter, 8.8 million shares of ExxonMobil (NYSE:XOM), actually started with a larger 31 million-share buy in the quarter ended June 30. Based on the Sept. 30 13F, this makes ExxonMobil Berkshire's seventh-largest stock holding, worth $3.75 billion. While that's significantly smaller than the company's holdings in Wells Fargo, Coca-Cola, IBM, and American Express -- each worth more than $10 billion -- ExxonMobil is perhaps the most "Buffett" of all the companies that Buffett has invested in over the years. Let's take a look at why.
The big-oil version of Berkshire?
ExxonMobil has its fingers in every segment of the oil and petrochemical business and is the largest public company in the world. While there's no doubt it's incredibly diversified -- as Berkshire is, with subsidiaries that do everything from lease jets to sell ice cream -- it shares a common trait with Berkshire's wholly owned subsidiaries like BNSF Railway, GEICO, and MidAmerican Energy, as well as Berkshire's large public investments like Coca-Cola, all of which are actually pretty specialized and focused on what they do best. Coca-Cola, which has become one of Buffett's signature investments over the years, doesn't compete with peer PepsiCo in the snack business, instead remaining focused on its core beverage business.
But that's just the start, because it's more about how well ExxonMobil redeploys the capital generated by its business that really gets to the core of what makes ExxonMobil so very Buffett. Let's face it: When you're Warren Buffett -- arguably the best capital-allocator ever -- this is incredibly attractive, because it's pretty much exactly how Buffett works with Berkshire Hathaway's excess capital when he invests it for shareholders.
Rule No 1: Don't lose money. Rule No 2: Don't forget rule No. 1.
This gets to the heart of what makes ExxonMobil such a tremendous company, as well as a worthy investment, even though its enormous size can make outsize returns seem unlikely. One only has to look at the company's most recent annual reports to see -- typically within the first several pages -- how much emphasis the company puts on safety. And while this makes sense for many reasons -- for example, it lowers the risk of employee injuries and environmental harm, which reduces liability and the financial harm it brings -- it's also an indication that management is aligned with making prudent financial decisions.
A couple of weeks ago, Foolish contributor Robert Baillieul described exactly how well management's decisions to allocate capital have played out. The company's success in this area is largely a result of prudent, conservative capital-allocation decisions that result in predictable, if moderate, gains, as opposed to high-risk, high-reward gambles that can cause major losses when they don't pan out. This is at the heart of how Buffett invests; he has enjoyed more than five decades of success largely based on minimizing risk, rather than reaching for outsize, potentially improbable returns that carry the risk of major, permanent losses.
Our favorite holding period is forever
You've heard those words before, but these six words are just the end of Buffett's statement, taken from the 1988 shareholder letter. The first part is perhaps more important: "In fact, when we own portions of outstanding businesses with outstanding managements..." After all, it's CEO Rex Tillerson and his team at ExxonMobil who have managed to produce such industry-leading returns over the past decade.
How good are they? 2012 marked the 19th consecutive year in which the company's reserves discovered replaced more than 100% of the year's production. Simply put, ExxonMobil continues to look for (and find) the resources that will power its future.
Shade and trees; people and energy
Buffett once said, "Someone is sitting in the shade today because someone planted a tree a long time ago." How does this relate to ExxonMobil? According to the UN, the planet's population will increase by more than 1 billion people over the next 25 years. More than a billion new households will be created during that time, increasing demand for energy by more than 35%, according to the IEA.
Renewables like wind and solar are becoming a growing part of the energy future (and Berkshire subsidiary MidAmerican is heavily invested in both), but cheap energy from oil and natural gas is projected to remain central to how we power the future, and petrochemicals will remain industrial mainstays in the decades to come. Buffett surely sees this, and he's betting (to the tune of more than $3 billion) that ExxonMobil will be in the middle of the most profitable parts of it.
Should you follow suit? That's for you to decide.