Buffett Talks The Talk Should We Listen Up?

Overconcentrated positioning can make or break you. Tiger Global Management Fund dropped 25% during April and over 50% year-to-date. Microsoft was Tiger’s biggest position. Then throw in Meta Platforms and Amazon. Berkshire Hathaway is comparably concentrated, with Apple its sole mega-cap tech house position which is a home run. Among Berkshire’s 10 largest holdings you find American Express, Bank of America and Chevron. Its Apple position at quarter’s end came in at $159 billion, thereby dwarfing all other equity holdings, inclusive of financials which approach $100 billion in portfolio content.

Warren Buffett’s 1 year my senior and most definitely racked up mega bucks while I’m just in the “comfortable” zone. Microsoft is my biggest holding (through appreciation), but it’s doggy of late along with most other tech house big caps. Microsoft reported good numbers, unlike Meta Platforms, Amazon, Alphabet, Netflix and Tesla which were taken out and shot.

Berkshire’s portfolio has been an underperformer for several years over the past decade. Nobody’s perfect. Bank stocks do get you in trouble like in the 2008 - ‘09 financial meltdown, caused by mortgages written with flimsy coverage.

Right now, I agree with Buffett on banks. Unless onsetting recession runs deeper than expected, higher interest rates will lead to rising net interest margins on loan portfolios. The fillip to earnings could be as much as 20% provided loan losses don’t soar through the roof. Banks, finally, are acting better than the market, even on down days for the S&P 500 Index.

Meanwhile, Berkshire’s operating companies in the fire and casualty insurance sector and in reinsurance are taking big gulps of losses. Hard to see when this sector returns to normalcy. Geico ain’t no mythological operator, what Buffett would like you to accept. His commentary on Geico is too sketchy. The major downside variable for Geico is escalation in auto repair costs leveraging higher claims.

Allstate in its quarterly discussed this issue at some length. Income dropped over $1 billion. Geico’s first quarter showed an operating loss vs. year ago’s pretax profit of over $1 billion. Serious variance. Reinsurance turned profitable and investment income held up. We need more fill-in on claims frequency and loss adjustment expenses. When can the macro forces turn favorable?

I discount the weight of Berkshire’s portfolio of operating companies like the Burlington Northern Santa Fe and energy holdings. Such operating earnings are just not big enough to make much of an impact on total operating earnings. Same goes for manufacturing and services businesses. No inherent operating leverage.

I like Precision Castparts and Lubrizol, both high quality operators. NetJets, Clayton Homes and FlightSafety International are good operators in niche businesses along with McLane Company. Unless Buffett makes a sizable acquisition outside the financial sector, these properties just flesh out the annual report.

Lemme deal with hard facts on Berkshire’s operating outlook and what’s a fair premium over book value. Or, should there be no premium over book? After all, time’s winged chariot draws near for anyone over 90. Consider, a prospective investor can pretty much duplicate on his own Berkshire’s portfolio of stocks in the financial sector and buy into a mix of index funds covering the S&P 500 and NASDAQ 100.

Keep in mind, Buffett didn’t reenter the stock market near its bottom, March of 2020, and that performance over the past decade proved spotty. We’ve got total shareholder’s equity as of March, 2022 at $517 billion. Two-thirds of Berkshire’s stock holdings stay concentrated in 4 positions. Apple at $159 billion, a homerun, dwarfs all other holdings like American Express, Bank of America and Chevron. The financials soak up $100 billion or 25% of portfolio assets. This is a modest overweighting of the sector in the S&P 500 Index.

Current market value for Berkshire looks like $777 billion. We’re talking a premium over book value of nearly 50%. My gut tells me this is too much, even for a great operator like Warren. Wish him luck and pesetas.

Reviewing Berkshire’s performance dating back nearly 50 years, the great compares came in the sixties, but consistent outperformance ended over a decade ago. Warren pretty much missed the market’s recovery from the financial meltdown in 2009. Later on, the S&P 500 was driven by tech house mania, 2018 - ’19. Berkshire basically abhors high price-earnings paper. Later on, it took a major position in Apple, a more reasonably priced house. But Warren missed the 2019 - ’20 run up in tech. Last year was a push thanks to outperformance in Apple, a home run.

Past Decade Performance Vs. S&P 500

Berkshire S&P 500

2011 (4.7%) 2.1%

2012 16.8% 16%

2013 32.7% 32.4%

2014 27% 13.7%

2015 (12.5%) 1.4%

2016 23.4% 12%

2017 21.9% 21.8%

2018 2.8% (4.4%)

2019 11% 31.5%

2020 2.4% 18.4%

2021 29.6% 28.7%