Think you know everything about what stocks Warren Buffett buys and sells?
I hate to rain on your parade, but the truth is: You actually don't.
Source: The Motley Fool
And that reality can serve a valuable lesson to us all.
The perception
The Securities and Exchange Commission requires every institutional investment manager -- "an entity that either invests in, or buys and sells, securities for its own account" -- with over $100 million in assets to file what is known as a 13F filing which reveals the securities held by the firms.
As a result, every quarter Buffett's company -- Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) -- submits to the SEC its 13F-HR and from that we can see how Berkshire Hathaway's stock holdings have changed over the last three months.
Before we go on, I suspect I know what you're thinking: "Patrick, you just told us we don't know what stocks Buffett and Berkshire own, and then, in the very next paragraphs, you say that they're required by law to tell us what stocks are owned. You're an idiot."
But let's take a look at the five largest stock holdings for Berkshire Hathaway revealed in its annual report versus what is disclosed in the 13F filing, each dated Dec. 31, 2013:
As you can see, Coca-Cola, American Express, and IBM are a one-for-one match. Yet the holdings of Wells Fargo are underreported by 4.3%. And even more strikingly, the Wal-Mart holdings are underreported in the 13F by a staggering 15%.
So are Buffett and the Berkshire Hathaway management team lying to us? Should we be outraged? Does the SEC need to send an army of auditors to Omaha immediately?
The honest answer is: absolutely not. The key is reading the fine print.
The reality
The critical distinction is that Berkshire Hathaway files what is known as a "13F Combination Report." In it is stated in plain sight that (emphasis added) "a portion of the holdings for this reporting manager are reported in this report and a portion are reported by other reporting manager(s)."
In other words, what we see in the Berkshire Hathaway 13F filing are the stocks Berkshire Hathaway, owns. But another company, General Re New England Asset Management (GR-NEAM) -- which is owned by Berkshire -- also files a 13F that further discloses what is included in Berkshire's stock portfolio.
So what happens when we combine the holdings in the 13F's filed by Berkshire Hathaway and General Re New England Asset Management relative to what is shown in the annual report?
First you can see the Wells Fargo holding moves from being underreported to over reported. But this is because GR–NEAM is "a global investment advisor that specializes in offering capital and investment management services primarily to the insurance industry."
In other words, that small variance of an additional 0.9% is likely could be attributable to the fact GR-NEAM provides investment management services, and a select portion of those Wells Fargo shares are held on behalf of its clients. In addition the Berkshire annual report also notes that the shares listed exclude those "held by Berkshire subsidiary pension funds," so there won't always be a direct one-to-one correlation
But you can also see, there is now a direct match to the Wal-Mart position disclosed in the annual report.
So, why is this important? Consider for a moment the following from an article by CNBC dated May, 15, 2014, based on the SEC filing for the period ending 3/31/2014:
Warren Buffett added to Berkshire Hathaway's bet on Wal-Mart, increasing its stake in the retailer by 17 percent to 58.05 million shares during the first quarter. The additional 8.57 million shares are worth about $658 million at the stock's closing price Thursday of $76.83. [...] With a total value of $4.46 billion, the Wal-Mart stake is probably being controlled by Buffett himself.
If the annual report dated Dec. 31, 2013, shows that Berkshire owned 56.8 million shares, then an increase to 58.1 million shares at the end of March would represent a gain of 2.2%, not 17%.
Why did this happen? Many in the media often only report what is disclosed in the Berkshire Hathaway 13F filing. But since the positions held by GR-NEAM are not considered, this doesn't present the true picture of what is held by Berkshire Hathaway in its entirety.
A further dive reveals GR-NEAM didn't add to its stake in Wal-Mart, so it is true that 8.6 million additional shares of Wal-Mart were purchased.
But the position actually grew from 56.8 million to 65.4 million, a gain of 15%, not 17%. And most importantly, at the closing share price of $76.83 that would mean the value of the Wal-Mart position actually stood at $5.0 billion, not $4.46 billion.
Source: The Motley Fool.
The takeaway
There are a few things investors must recognize.
First, while we know a lot about it, examples like this reveal that Berkshire Hathaway is a remarkably complex company with many nuanced aspects surrounding both how it is structured and how it is managed. It can be understood, but it takes effort.
And more broadly than just Berkshire Hathaway, this only further emphasizes the point that in order to truly make a sensible investment, one cannot rely solely on the media's reporting.
That likely sounds odd coming from someone writing for an Internet publication, but we do our best at The Motley Fool to go one step further, and truly seek to understand a company and its in their entirety. Yes, we're a media outlet, but we attempt to go beyond just the news.
The bottom line is, if you're considering an investment in a company: Do the research yourself, or entrust yourself to someone who will do it for you with proven success at a reasonable price. And if aren't comfortable with either of those, consider buying low-cost index funds.
You don't have to be Buffett to understand companies and make correct investment decisions, but you do have to be disciplined and actually commit to taking the time to do your research. Examples like this one about Buffett and Berkshire's "secret" stocks only further prove this point.
