Thursday, September 22, 2005

Tracking Buffett

I have been tracking Berkshire Hathaway's stock holdings since Q4 of 2003. The company usually files with the SEC about a month and half after the end of the quarter. My thinking was that I might be able to learn a thing or two from Buffett (or Lou Simpson at GEICO for that matter).

When I tallied everything up for that quarter I discovered, for example, that Cadbury Schweppes (NYSE: CSG) had been added to the porfolio. This means Berkshire had bought CSG at prices ranging between $25 and $30. At the time of filing, the stock was trading in the mid $30s. Curiously, CSG was eliminated from Berkshire's filings the following quarter whenBerkshire notified the SEC that it was not obligated to disclose foreign corporation holdings. In any case, the shares traded in the $30-$35 range through October 2004 and then took off to a recent close near $42.

In 2004, Berkshire either eliminated or reduced several of its holdings. It also asked the SEC for confidentiality treatment on its Sun Trust holding in Q4 (In Q2 of 2005, Sun Trust reappeared in the SEC filing but the position had been pared back by 45%). Additions to the portfolio included Pier 1 (NYSE: PIR) in Q2, Comcast Corp (Nasdaq: CMCSA) and Servicemaster Company (NYSE: SVM) in Q3, and Dean Foods (NYSE: DF) in Q4. The Comcast position was doubled in Q4. Incidentally, SVM's business is as simple as providing lawn-care and housekeeping services. Classic Buffett!

So far in 2005, Berkshire has asked for SEC confidentiality on its H&R Block and Torchmark holdings. It has also added Home Depot (NYSE: HD), Lowes Companies (NYSE: LOW), Lexmark International (NYSE: LXK) and TYCO (NYSE: TYC) in Q2. Not disclosed but widely publicized, Berkshire also took a 'significant' position in Anheuser Busch (NYSE: BUD) in Q1.

If you are curious, BUD is trading below the $47-$49 Buffett would have paid (but keep in mind that Berkshire may have gotten warrants or preferred shares for its investment). So is PIR which Berkshire probably bought at prices ranging from $17 to $20. Berkshire added Comcast over two consecutive quarters with prices ranging from high $27s to about $30. The stock is at $29 after hitting a high of $34.5 earlier this year.

To be sure Buffett has had his share of bad calls. But overall, his track record speaks for itself. What I should have done was to buy his B shares (NYSE: BRK-B) at $1,000 when he issued them in 1996. Instead I waited 9 years before I finally added a few shares to my portfolio at $2,800.

I also like the Comcast story: largest cable operator in North America, strong and growing free cash flow, declining capital expenditures and a generous stock buyback program. In the most recent earnings call, Comcast's CEO expressed disappointment with the share performance but noted that this has provided him with opportunity to buy back shares at prices management views as attractive. I have added Comcast to my portfolio at around $32.

Finally, I am intrigued by Pier 1, the largest specialty furniture retailer in North America. The company is in big trouble as competition from Target and Wal-Mart is heating up. Yet, this is a 43 year old company with CEO who has been at the helm for 30 years. He has been through it all. Buffett must like the management team if he invested. I am sure he is also fond of the dividend (which at these prices is north of 3%!) and the share buyback program. Pier 1 has hardly any debt and slowing store expansions to concentrate on improving productivity and operating margins. This fall, the company will mail its first nation-wide direct-mail catalog. I have added Pier 1 at around $12.50. It is comforting to know that Buffett understands the furniture business well. After all, he did purchase 90% of Mrs. B's Nebraska Furniture Mart for $60 million in 1983 with a handshake.

Wednesday, September 07, 2005

Mr. Market

The trip to Bandon was a success. My game held up and I even managed to post a few good scores.

I recently finished reading a fantastic book titled “Buffett: The Making of An American Capitalist” by Roger Lowenstein, a WSJ reporter. He did an excellent job chronicling Buffett’s early days and his path to success.

This book is a great read for anyone who wants to learn more about Buffett’s way of thinking and his philosophy about investing. You will also learn about the annual gathering of the Graham Group (founded by Buffett) which has grown in size throughout the years and includes renowned value investors such as Bill Ruane as well as Buffett’s good friend Bill Gates. What is important to note is that Buffett has modified Graham’s highly quantitative approach and introduced a more subjective and qualitative outlook on potential investments, a la Philip Fisher. This is manifested in his decision to buy shares of mega-franchises such as Coca-Cola and American Express. The shares may not have been “cheap” according to Graham’s view of the world, but Buffett’s genius was to understand the future earning power of these companies, to redefine “value” and to buy the shares at a “fair price”.

Buffett’s philosophy is summarized by Lowenstein and I have paraphrased them below. Print this and pin it on the wall next to your computer. It’s simple but powerful. The trick is to control your emotions when you invest. Do your research, make a decision and commit big time. As Ben Graham would say, do not let Mr. Market’s ups and downs trick you into questioning yourself.

  1. Don’t worry about economic forecasts and analyst price targets. Assess the value of the company from a long-term perspective and become part owner of the business by buying shares at a fair price.
  2. Invest in companies in which managers behave as owners and treat investors’ capital with care and responsibility (think return on equity).
  3. Buy stocks in companies and industries which you understand well.
  4. Do your own research.
  5. When you have identified an opportunity, buy the stock and buy a ton of it!