Wednesday, February 18, 2009

Should you follow Warren Buffett’s latest moves?

Berkshire Hathaway (BRK-A, BRK-B) published a glimpse of its stock portfolio holdings as of December 31,2008, on the SEC website. I have highlighted the largest changes in shares owned.

In the last quarter of 2008 Warren Buffett kept adding to his Burlington Northern (BNI) position by purchasing well over 6 million shares for Berkshire’s account. He also added to his positions in Ingersoll- Rand (IR), NRG Energy (NRG), and Eaton (ETN). He initiated positions in Constellation Energy Group (CEG) using his Midamerican subsidiary and in Nalco (NLC).

Buffett was not only buying American however. He was selling as well. Berkshire cut its stake in Johnson & Johnson (JNJ) by half to 28 million shares. Other notable decreases included Procter & Gamble (PG), US Bancorp (USB), Conoco-Phillips (COP) and Carmax (KMX). Berkshire also disposed of all of its Anheuser-Busch stock, which was tendered at $70/share after the merger with InBev. The holdings in other financial stocks such as Wells Fargo (WFC), American Express (AXP), Moody's (MCO) and Bank of America (BAC) were mainly unchanged for the quarter.

The value of Berkshire’s portfolio dropped to $51.87 billion from $69.89 billion at the end of third quarter 2008. Even the Oracle of Omaha is not immune to market corrections, especially now that his asset base is so huge. Berkshire Hathaway shares dropped by 26% in the last quarter of 2008, compared with a 21.5% drop for the broad S&P 500 index. So far this year both S&P 500 and Berkshire Hathaway stock are down between 12.20% and 13% each respectively.
Given the changes in Berkshire Hathaway’s portfolio, I would not recommend acting similarly in your personal investments, based solely on following Buffett’s moves. One reason why he might be selling solid dividend stocks such as Johnson & Johnson and Procter and Gamble could be that they haven’t fallen as much as the broader market, which makes them ideal for Buffett to deploy the funds in other beaten down sectors. Another reason could be that he needs to raise as much cash as possible, in order to participate in other preferred stock or fixed income deals, where he could earn a 10%- 15% annual dividend yield, with very favorable terms for his company. Ordinary investors do not however have the purchasing power to participate in such favorable deals at this time. His list of fixed income or preferred stock investments range from Goldman Sachs, General Electric, USG, Swiss Re, Harley Davidson and Tiffany’s.

As a dividend growth investor, I still consider Procter & Gamble and Johnson & Johnson one of the essential holdings in my dividend stock portfolio. Warren Buffett is not always right when it comes to selling. He did sell his stake at McDonald's (MCD) in 1998. In his 1998 Letter to Shareholders he mentioned that "In particular, my decision to sell McDonald's was a very big mistake.Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours."

Full Disclosure: Long GE, JNJ, PG, MCD
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  1. Oddly, the 13G filed by Berkshire Hathaway on Conoco Philips yesterday reports 84,896,273 shares of Common Stock held as of December 31, 2008. That would be an increase from the prior quarter.

    I don't know why there's a discrepancy in the numbers between the 13-F and 13G.

    Agree with your analysis on JNJ and PG and love your blog!

  2. Agreed. I love WB and follow his every move. But the fact remains that most of us are not looking to put billions of dollars to work and we can't get the corporate debt deals he can. So we are going to do things differently.

    I do enjoy trying to figure out the reasoning for his actions. I would agree that the recent sales are not lack of faith in those stocks, but just simply taking advantage of better capital allocation opportunities.

  3. Anon,

    Buffett is aware that there are thousands of investors mimicking his every move. That's why he is holding BRKa's positions through multiple subsidiaries. ?He's trying to confuse us all :-)


    Thanks for your comment. I do agree that WB's principles at this moment cannot be easily replicated by investors like u and me.

  4. You are right - Warren Buffet is not always right. But I did like the fact that he had the guts to admit the same.

  5. Thanks for this post and your analysis.

    To play the other side, maybe we should follow Buffett in selling JNJ. If as investors we have a limited amount of capital to invest, then we should place it where it has the best risk-adjusted returns. If Buffett has found better places, shouldn't we as well?

    That assumes, of course, that we can find them. But given the insane valuations on some small-cap and microcap stocks, it doesn't strike me as that difficult.

    JNJ is a fine company, but not the best value in today's market--at least that is what Buffett's actions suggest.


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