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It's better to have a partial interest in the Hope Diamond than to own all of a rhinestone. -- Warren Buffett on stocks.
Berkshire Hathaway's (NYSE:BRK-B) (NYSE:BRK-A) stock portfolio is valued at more than $117 billion, more than six times larger than the median S&P 500 company by itself. According to Motley Fool Analyst Brendan Matthews, it's worth about $93 per share of Berkshire's "B" stock.
The bottom line is Berkshire CEO Warren Buffett has built incredible value for Berkshire shareholders, and by following a very simple formula:
- Invest in great companies that you understand.
- Hold those investments for very long periods of time.
- Repeat steps 1 and 2.
Let's take a closer look at Berkshire Hathaway's "big four" most valuable common stock holdings, which alone make up more than half of the entire portfolio's value. There's an incredible lesson we can all learn about the value of holding a collection of great companies, and doing it for a very long time.
Time is the friend of the wonderful business -- and you
While much of Buffett's reputation is built around his skill as a stock picker, his recipe has been incredibly straightforward. His "big four" -- are American Express, Wells Fargo, Coca-Cola, and, IBM. Combined, Berkshire's holdings in these companies are worth more than $67 billion at recent prices. And Berkshire only paid $27.6 billion -- but that's just the tip of the iceberg.
Take Coca-Cola as an example. Berkshire hasn't bought a single new share of Coke stock in more than 20 years. In 1994 it owned 7.8% of the company. As of the end of last year, Berkshire owned 9.2% of Coca-Cola, due to Coke's long-term policy of share buybacks, making it the company's largest single investor.
The power of dividend growth is just as incredible. Since 1994, Coke has paid Berkshire almost $5 billion in dividends. It gets even better when we add in the other three. Over the past 12 months, IBM, Well, and American Express have paid Berkshire more than $1.3 billion in dividends, and Berkshire owns a larger percentage of each company because of share buybacks at those companies as well.
All Buffett did was buy what he discovered to be a great business with durable advantages, and at a fair price. He invested on the same stock exchanges that you and I use. He paid market prices for the stocks. No special deals. Just investing in great companies, and then getting out of the way.
Rule #1: Never lose money. Rule#2: Never forget rule #1
Buffett isn't infallible, and he's lost money on stocks before. However, his "never lose money" quote is probably as much about the long-term thesis as it is about anything. One of the biggest reasons that Buffett has been so successful, gets back to being willing to hold a stock for very long periods of time.
To be willing and able to do that -- especially when things go bad and a stock price falls -- is by understanding what you own. If you've taken the time to invest in yourself and learn about a company before you actually invest in the company, you'll find it much easier to ride out the market's volatility. IBM is a great example of this with Buffett.
Buffett made a big splash in 2011, investing $10.8 billion in the tech giant after eschewing technology companies for decades. He's added to the position since, with Berkshire having invested $13.1 billion in IBM stock through the beginning of the year. The company has struggled over the past few years, but Buffett has been unwavering in his support. He had this to say in a March interview with CNBC:
I actually wrote, a couple of years ago when we bought it, that the best thing that could happen would be for the stock to do nothing, because they were going to buy [back] a lot of stock. The cheaper the stock, the more they would buy back, which would increase our interest in it.
He went on to say that he expected revenue to decline as the company sold off unprofitable business units, and that he understands the impact of foreign exchange on its results today. He may not understand the nuances of tech, but he's shown that he understands the difference between a company in trouble, and a company with durable competitive advantages in the midst of a transition.
What's the lesson here? It's twofold. Not every investment will make money, and sometimes it just takes time for things to play out. But by understanding the business and the economics -- as Buffett surely does with IBM -- you're not as likely to violate Buffett's first rule of investing, "never lose money," by selling at a loss when things might actually be going just fine.
Trees, shade, and thinking in much longer terms
Buffett once said, "someone is sitting in the shade today because someone planted a tree a long time ago." The point is, wealth doesn't come quickly, and great things can take a very long time to come together.
When it comes to investing, Buffett's "secret" is nothing more than the patience to learn about a handful of great companies, the discipline to invest in them at a fair price, and the temperament to leave them alone for years and years.
If you can master these simple things, the returns can be life-changing. That's a lesson we should all take to heart.
Jason Hall owns shares of American Express, Berkshire Hathaway, and Wells Fargo, and manages a family account with shares of Coca-Cola. The Motley Fool recommends American Express, Berkshire Hathaway, Coca-Cola, and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines, and Wells Fargo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.