Saturday, February 8, 2014

Warren Buffett is now working for me

I recently initiated a position in Berkshire Hathaway (BRK.B), which is the holding company of billionaire investor and philanthropist Warren Buffett. Over the past year, I have studied almost everything publicly available on Warren Buffett and how he accumulated his sizeable fortune. This included his early years where he was obsessed with numbers and businesses, his Buffett partnership years, and his latest investments at the helm of Berkshire Hathaway over the past 50 years.

The reason behind my purchase of Berkshire Hathaway is because I want to be able to go to the 2014 Berkshire Hathaway meeting of shareholders in May.There is a 50/50 chance that I will be able to attend the meeting.  I actually purchased just one “B” share with the Loyal3 brokerage service, so technically the amount I invested is immaterial to my net worth. I am a big fan of Warren, and have learned a tremendous amount from his teachings on how to view stocks as ownership pieces of real tangible businesses, not just some abstract concept to speculate on. Incidentally, I have found specific evidence that he is a closet dividend investor, as he is focusing on extracting and deploying excess cashflows from companies he owns into more income generating businesses.

I believe that the Berkshire Hathaway that Warren built from the remains of the old textile mill is a collection of high quality businesses run by good managers. I believe that Berkshire will endure for decades after Warren stops running it. It is very likely that it would be able to at least match the returns of the S&P 500 over the next few decades. However, I would never put a material portion of my portfolio in Berkshire Hathaway. The main appeal behind the company for me would be the man itself, Warren Buffett. Unfortunately, I am not so sure that he would be around for the next 30 years, which is my long-term investing horizon. In addition to that, Berkshire does not pay a dividend, although it might initiate it once the Gates Foundation receives most of it.

That being said, I am writing this post in order to alleviate any potential concerns that I am all of a sudden switching strategies. I am not, and this one share of Berkshire Hathaway is as inconsequential as the silver coin collection that my grandfather gave me several years ago, or the 40 or so euro’s I have left after my trip to Europe last summer. I am also typing this up, because I am slowly trying to be more open on this site, by posting things like recent personal investments for example and my dividend  portfolio holdings.

Relevant Articles:

Warren Buffett Investing Resource Page
Warren Buffett – A Closet Dividend Investor
Warren Buffett on Dividends: Ideas from his 2013 Letter to Shareholders
My Dividend Portfolio Holdings

8 comments:

  1. The other good reason to purchase a share of this stock is to see what Warren Buffett's portfolio is investing in. Since I my entire drip portfolio is in my Roth, and I'm limited with what I can put into that account, I'll hopefully see it through your site. I'm thinking the top ten stocks in his portfolio are prime.

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  2. I have a large, very diverse portfolio and I usually agree with your posts. I've owned BRK B once in the past but sold it because of poor growth. I bought again at my husband's suggestion for our joint account and again it has done nothing. It doesn't pay a dividend and it's usually at the bottom of the heap for income. Never again.

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  3. DGI,

    I own multiple shares of BRK.B in my dividend paying stock portfolio. My logic is this, I am in need of accumulating wealth as well as building my future passive income. BRK.B provides me growth and I can use profits to purchase more dividend payers. BRK.B provides me with good diversification with low market volatility relative to the S&P500. I have a 3-year average return of 15.1% with less risk than most of my dividend paying stocks.

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  4. DGI Investor;

    It's rare to disagree with you, but I feel you are incorrect regarding a potential initiation of a dividend once the Gates foundation receives most of Warren's stock.

    Warren has clearly indicated that his bequest will be paid out over 20 years. Additionally, the foundation must spend all of it's yearly gift (plus 5% of the foundation's assets) in the following year. While the foundation could hold the BRK and sell others things they will eventually have to begin selling his stock on a near annual basis.

    http://www.berkshirehathaway.com/donate/bmgfltr.pdf

    Additionally, his bequest takes the form of non-voting Class B stock. This will have the effect of increasing the voting control of the remaining Class A holders. Together with his designation of Howard as the next chairman, I doubt the culture on the board of directors will change much in the 20+ years after Warren's death.

    That said, I believe BRK is potentially a good investment because it doesn't pay a dividend. This factor allows you to build wealth and not have a periodic income stream subject to taxation. IE; only sell when you need a large inflow of money for irregular expenses (new car, gifts to children etc). (Here in Canada, we pay a lower rate on capital gains then dividends.)

    For me though, that point is a decade or so away. Until then I will continue to purchase high quality dividend growth stocks in order to fund my retirement.

    Thank you for the effort you put into producing meaningful posts.

    Cheers,
    David

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  5. First Anon,

    You can actually see BRK.A holdings on the SEC website.

    Second Anon,

    Could you please read the article again and let me know exactly why we disagree?

    BRK was a great investment in the early days. But it has gotten so big, size restrains growth.

    RTD,

    BRK.A could deliver a decent return in the future. Charlie Munger expects it to slightly outperform S&P 500. We have to wait and see.

    ReplyDelete
  6. First Anon,

    You can actually see BRK.A holdings on the SEC website.

    Second Anon,

    Could you please read the article again and let me know exactly why we disagree?

    BRK was a great investment in the early days. But it has gotten so big, size restrains growth.

    RTD,

    BRK.A could deliver a decent return in the future. Charlie Munger expects it to slightly outperform S&P 500. We have to wait and see.

    ReplyDelete
  7. David T,

    I like when people disagree with me, and provide justification of why they think what they think.

    The letter to Bill and Melinda is interesting, as it discusses how gains in BRK will likely be higher than the 5% he is donating.

    When I was thinking about the dividend, i was also thinking about the fact that cash is building up, and large acquisitions and special deals that Buffett makes might not be the norm in the future. Therefore, the company might start paying a dividend. Otherwise, they will just have way too much cash at HQ, which could be bad.

    As for dividends being bad, I am not sure. I would much rather get a total return in the form of dividends and capital gains than capital gains alone. Your goal should be to make money in investments, and only then worry about taxes, not the other way around. You never hear someone say " oh I don't want to accept CEO job and earn $1 million, because that would push me to the highest tax bracket. I'd much rather stick with lower management ;-)"

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  8. I hope you get to go. Listening to Warren and Charlie is great, but so is all the networking you get to do with other value investors throughout the weekend.

    ReplyDelete

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