Buffett’s Office Investment Pool: a 45% Gainer Helps the Kid Down the Hall

In his annual shareholder letter, Berkshire Hathaway (BRK.B) chairman Warren Buffett declared that the “Big Four” stock investments in Berkshire Hathaway’s $87 billion had “all had good years.”

In terms of basic stock performance, only American-Express (AXP) and Wells Fargo (WFC) had market-beating returns, while Coca-Cola (KO) and IBM (IBM) lagged, as seen in a stock chart.

AXP Total Return Price Chart

AXP Total Return Price data by YCharts

That’s no doubt of little interest to Buffett who invests for the long-term. In the case of all but IBM (a 2011 purchase) we’re talking decades. Looking at just the past five years, his Big Four -- which account for roughly 60% of Berkshire’s investment portfolio -- more than delivered.

AXP Total Return Price Chart

AXP Total Return Price data by YCharts

Buffett explained that Berkshire’s ownership stake in all four companies increased last year, and he expects more of the same this year. For both Coca-Cola and American Express the rising ownership stake is a function of the firms’ stock buyback programs; Buffett hasn’t bought additional shares in either company for years.

But he’s still been actively adding to the other two positions. The IBM stake has been added to in every quarter since Berkshire first established the position in early 2011. And since mid 2010 there has been only one quarter (out of 10) where Berkshire didn’t increase its Wells Fargo position. (The first quarter of 2011). In fact, Wells Fargo has now supplanted Coca-Cola as Berkshire’s biggest position, accounting for 20% of the portfolio, compared to about 19.25% for Coca-Cola.

IBM’s 2012 stock gain might seem shrug worthy, but it quietly delivered a nice shareholder return. Its total yield -- dividend yield plus the percentage reduction in shares outstanding -- nets to 6.7% over the past year.

As solid as Buffett’s Big Four are, he made it clear in the shareholder letter that he came in third in this year’s office investment pool. He wrote that the investment portfolios for his two sidekicks -- Todd Combs and Ted Weschler -- each beat the S&P 500 “by double digit margins.” That means their portfolios were up a minimum of 26% last year. As Buffett noted in six-point type: “They left me in the dust as well.”

Directv (DTV) and DaVita HealthCare (DVA) are the two largest Berkshire holdings that are the handiwork of Combs and Weschler. Though small compared to the Big Four stakes, they have nonetheless grown big enough to rank in the top 10 of Berkshire holdings.

Directv was added to the portfolio in the first quarter of 2011 and the stake has been added to in every quarter since. The DaVita position was initiated in the fourth quarter of 2011 and it too has been added to in every quarter since. DaVita’s 45% gain in 2012 certainly dusted the market’s 16% pickup, while Directv’s gain bested the market by one percentage point. Given DaVita’s strong recent performance it should come as no surprise that the dialysis company might be the less interesting stock for value-minded investors to sniff around, considering the PE ratio.

DTV PE Ratio TTM Chart

DTV PE Ratio TTM data by YCharts

General Motors (GM) is also of note as a non-Buffett holding. Berkshire initiated the position in the first quarter of last year, buying 10 million shares. At the end of the year that stake was up to 25 million shares. That’s still less than 1% of Berkshire’s investment portfolio. It will be interesting to see if the stake continues to grow in the first quarter of this year. Clearly in the fourth quarter there was enthusiasm, as Berkshire’s shares jumped from 15 million to 25 million. Today’s stock price is 27% higher than at the beginning of the fourth quarter, but GM’s 9.3 PE ratio -- though higher over that same stretch -- isn’t looking overheated.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.



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