- Martin Sosnoff
A Hot Money Manager Is Not What You Need
What’s to learn from a Warren Buffett portfolio with positions like American Express dating back to the 1960s? Yes! You hang in with franchise operators like American Express. But, past 5 years or so, Berkshire Hathaway’s equity portfolio has underperformed its benchmark, the Standard & Poor’s Index of 500 stocks. If Warren were running OPM, he’d been terminated long ago.
Years ago, Warren did latch onto Apple when it was sort of a neglected growthie, but his keen sense of valuation kept him away from Amazon, Facebook, Alphabet, even Microsoft. Big outperformers past couple of years.
Overweighted positions in bank stocks do turn problematic because of flattish net-interest margins on outstanding loans. Financial sector weighting is second only to technology. You can’t afford to be wrong for too long. But, Berkshire’s portfolio is laden with low cost-basis banks which makes it too costly to lighten up on.
Today, scanning quarterly portfolios of the would-be overachievers, you’d find many with ants in their pants. Operator turnover ranges up to 100% over a 12-month time span. This ain’t money management, but rather antic trading. None of these operators will make the hall of fame.
Quarterly 13Fs which list top 10 holdings of sizable portfolios show alarmingly low static ratios for most managers. Let’s start with Buffett’s Berkshire Hathaway which is the gold standard herein. Its static ratio comes in around 77% with only 7% of holdings totally eliminated.
Carl Icahn, with a static ratio of 70% is the sole other operator with a consistently high percentage of holds. He’s heavily weighted in the energy sector with Cheniere Energy and Occidental Petroleum, rank speculations. Of late, with the move in energy futures from high-forties into the eighties, I give Carl high marks for iron pants and much fortitude.
I’ve traveled a different road in energy with major positions in MLPs like Enterprise Products Partners. Of late, it acts like it may rollover belly-up in the water. There’s a relatively conservative management here that doesn’t distribute all its cash flow to shareholders so fast. Hey, guys, gimme a higher return on invested capital real soon.
When I look at Pershing Square’s $10 billion portfolio, I’m impressed with the 21% holding in Lowe’s. I own Home Depot. If you believe housing has a long way to go before over-building sets in, this is a natural sector play, but not exactly unrecognized. Both stocks sell at a high twenties price-earnings ratio. Difficult, but not impossible to live with.
I’ve found property in Palm Beach is a better play than anything in the East Bronx. No supply of inventory on the horizon. Little vacant land to build on. If I stuck to real estate and collecting contemporary art, I’d have something to crow about. I wouldn’t have to try to tear apart Amazon’s income statement to rationalize my position. Think of all the 13F portfolios I’ve scanned.
When I devoured T. Rowe Price’s portfolio with a market cap of a trillion bucks, I nodded my head in agreement. Own the biggest and best. Here you find Microsoft, Amazon, Alphabet, Meta Platforms and Apple leading the parade. Then, throw in General Electric and UnitedHealth Group. You could do worse. I didn’t care for their low-static ratio of increases and decreases in the portfolio. Why do fine tuning if you own quality paper?
Surprised to see so few cyclical plays in a couple of dozen portfolios. After all, stocks like Halliburton, U.S. Steel, Alcoa, Freeport-McMoRan, even Macy’s have gone around the clock several revolutions.
Renaissance Technologies is now losing money on its $77 billion portfolio with a zero static ratio. Not understandable as a traditional house, but a quant’s habitat. Money management for them is not exactly a replica of what Warren Buffett deals in.
I found Macy’s in Appaloosa Management’s portfolio, a 3.7% position. I’m over 10%, but largely from appreciation. Alphabet and Meta Platforms (the old Facebook) are hefty holdings, nearly 20% of the portfolio. I can understand this kind of speculation because it’s what I do, but in a low-static ratio format.
In Citadel Advisors, I finally found someone owning Tesla, but under a 2% position. This is a pure growth batch of stocks. You could do just as well owning a position in the NASDAQ 100 Index, and for very low cost.
My takeaway on these would-be overachievers is they’ve played technology heavily but missed out the past 18 months on cyclicals and energy properties. Light, too, in financials. Few operators show a thematic wholeness in their implementation. Turnover remains unacceptably high, a sign of weakness rather than flexibility.
Individual investors should think hard about self-implementation in equity and bond indices. Maybe, NASDAQ 100 and a couple of high-yield funds today.