Last week, Berkshire Hathaway just reported that they made their biggest quarterly earnings after the closing bell. Buffett and Berkshire reported an increase in profits by 41% to $6.4 billion. We thoroughly looked over the Berkshire Hathaway 10-Q over the weekend and took copious notes. Here are the biggest takeaways to pay attention to:
The Berkshire Hathaway stock holdings are much focused. The top holdings in their account consist of 58% of their entire investment in equities. They own $10.5 billion worth of Bank of America options as well, so if you include them the top 5 holdings consist of 60% of the total book. When you dig through it, Buffett’s portfolio appears to be even more concentrated. The total equities value $119 billion. As of June 30, the largest Berkshire Hathaway holding was in Wells Fargo at $25.4 billion. Next, you have Coca-Cola at $16.9 billion. American Express is 3rd at $14.4 billion. Finally IBM is 4th at $12.7 billion. The company has an option to buy 700 million shares of Bank of America stock for $5 billion that runs out in 2021. Based on the current market value, the total equity position would be worth $10.5 billion, so it is dramatically misrepresented when looking at real value. By adding up the 5 biggest equity positions of Berkshire Hathaway, we realize that 3 of them are financial companies, plus you have a Coca-Cola position that has been around for years and shares of IBM that Berkshire Hathaway has accumulated over the last 2 years at an average price of $171 per share. It’s the only tech stock that Buffett owns and one of his biggest losers as well when compared on a relative basis, going up just 10% in value even though the S&P 500 has soared by as much as 3 times higher.
Warren Buffett may speak a big game about taxes but Berkshire Hathaway plays by the same accounting rules as everyone else. The majority of the increase in earnings had everything to do with gains in investments, in large part by cashing out when Jeff Bezos, Amazon CEO, purchased the Washington Post. By swapping out his shares instead of taking cash, Buffett was able to take advantage of a 100 fold gain in the Graham stock purchase that he made during the 70s without having to pay any taxes on it.
Speaking of Jeff Bezos, Warren Buffett clearly has much in common with the tech gurus as far structure goes. The massive cash flow from insurance operations at Berkshire Hathaway basically funds everything that the company does. Insurance is to Berkshire Hathaway like Windows is to Microsoft and Google is to search. It’s a nonstop flow of money that provides Buffett the ability to allocate massive amounts of capital and put it to work. The difference is that Buffett uses this money to purchase businesses like Heinz as opposed to What’s App and Beats headphones.
Warren Buffett’s true secret, besides a strong emotional drive and a high IQ, is his optimism. Berkshire Hathaway is ultimately just a huge play on the rebounding of the US economy. Coke, ice cream, trains and banking. Buffett’s famous for the saying “be greedy when others are fearful,” but his real gift is that he believes in America and he is levering up on it. He makes money by betting against large catastrophic events in insurance. He then uses this money to bet against the collapse of the US economy. That’s been his overall formula for the last 60 years. If you take nothing else away from these notes on Warren Buffett – one of the richest men in the world – please realize that he earned his fortune by betting against US doom and gloom. That’s a lesson that we should all learn.