Buffett's still got it at 94. The TPP market commentary.

Buffett’s still got it at 94.

Warren Buffett is generally considered one of the greatest investors of all time. Berkshire Hathaway, the company he’s managed since 1965, has returned 19.8 per cent annually through the end of 2023 during Buffett’s leadership, nearly doubling the return of the S&P 500 on an annualized basis over that time period.

A $1,000 investment in the S&P 500 would be worth about $280,000 today, compared to more than $35 million if you’d invested it in Berkshire. We always talk about the benefit of compounding returns, and this figure sums it up well.

However, Buffett is not what many people think of when it comes to Wall Street. He communicates complex financial topics in simple terms, lives in Omaha and shuns short-term trading.

Instead, Buffett takes a long-term view, sometimes holding stocks for decades as their value compounds for shareholders.

He famously once stated that his favourite holding time is ‘forever’.

Not only did the ‘Sage of Omaha’ turn 94 at the end of August but, just two days before his birthday, Berkshire became part of an exclusive club of eight companies each boasting a market capitalisation of more than $1tn. Incidentally, the first outside of the tech sector to do so.

A bit of Buffett-bashing is never going to be too far away at such times. Sceptics have questioned whether Berkshire’s portfolio is a relic of a bygone age and if its famously loyal shareholders would be better off buying an S&P 500 tracker.

In response to such criticisms, a large number of the world’s best portfolio managers have replied with a resounding ‘No!’

A total of 20 Elite Investors as followed by ‘Citywire Elite Companies’ are overweight Berkshire in the funds they manage. Everyone still loves Buffett! (source: Citywire)

For many of these investors, Berkshire is a lynchpin in their portfolios. For example, Brian Ferguson, lead manager of the BNY Mellon Dynamic Value fund, is one of Berkshire’s many backers.

‘Berkshire Hathaway is well positioned for what is proving to be a very uncertain economic and geopolitical backdrop,’ said Ferguson.

‘The cash and cash equivalents on the company’s balance sheet as of June 2024 were in excess of $270bn. In addition, Berkshire generates $30bn-$40bn in annual cash flow and has a low- to no-cost insurance float in excess of $160bn.  

‘Now the so-called era of “free money” is over – accommodative monetary policy including quantitative easing – the company’s comparative and competitive advantages make Berkshire well positioned against an uncertain and higher cost of capital backdrop.’

Larry Pitkowsky, another Elite manager who is a long-time Berkshire fan, topped up the holding of his GoodHaven fund earlier this year. Like Ferguson, he views the company as a particularly interesting investment at the moment.

In his view, as expressed in recent GoodHaven shareholder letters, Berkshire is one of several eclectic financials he feels is undervalued due to four prominent market fears:

Low interest rates/spreads will never improve and may worsen’

Newer ‘fintech’ competitors will take material market share from existing players;

Trading and loan losses will overwhelm capital in a downturn; and

Climate change will increase insurance risks and more and this will serve Berkshire well.

‘These are good concerns,’ said Pitkowsky. ‘We feel we have good answers, and so we have found these areas to be a fertile category for new and larger investments.’

It takes a multitude of views to create a healthy market. Scepticism from some quarters about Berkshire’s future provides an opportunity for investors who share the views of Elite backers like Pitkowsky and Ferguson.

In the view of the latter, Berkshire’s feat of surpassing a $1tn market cap is best seen as simply being a ‘testament to the intrinsic value that Warren and his team have compounded since the inception of the company in the 1960s.’

‍

What’s the magic sauce?

One thing that makes Berkshire Hathaway’s investment approach unique is that Buffett can purchase both stocks and entire companies. He has often written that he views the two purchases the same, no matter if he’s buying 5 per cent of a company or the entire thing.

Some of Berkshire’s longest and most successful investments have been when they’ve purchased an entire company, such as when it acquired See’s Candy in 1972 for $25 million. Buffett told shareholders in 2019 that See’s had produced “well over” $2 billion in pre-tax earnings for Berkshire since its purchase. See’s strong brand has allowed it to raise prices over time, helping it to limit the impact of inflation.

Another long-time holding was an investment in The Washington Post, which Buffett bought in 1973 and held for more than 40 years. The newspaper was sold to Amazon founder Jeff Bezos for $250 million in 2013, with remaining assets such as TV stations going to Graham Holdings, which Berkshire exited in 2014. The investment was a profitable one for Berkshire but would have been even greater if it had been sold earlier. At the end of 2004, Berkshire’s stake was worth nearly $1.7 billion, or about 154 times its cost of $11 million at the time. But Buffett knows that he won’t pick the top of the market any more than he will the bottom.

In recent years, Buffett has exited some long-time investments in the banking industry including Wells Fargo, M&T Bank and U.S. Bancorp. All three of those investments had been held for more than a decade. The sales of banks at the end of 2022 were well-timed, as the sector sold off following the collapse of Silicon Valley Bank in March 2023.

It has also been well documented in recent months that Buffett has sold out part of his Apple holdings, but Apple still makes up 30% of his stock portfolio with a total current value of $84 billion! Selling some out at an average price of $186 (now trading $223) is simply a smart investor realising some profits.

Berkshire will adjust its portfolio by buying and selling shares just like everyone else, it just gets more press than anywhere else when it does. He hasn’t lost faith in Apple, or sold out of Apple, he’s simply sold some after a great run.

In their last filings, Berkshire declared their largest holdings to be:

Apple:                                     $84 billion

American Express:      $35 billion

Bank of America:          $33 billion

Coca Cola:                         $25 billion

Chevron:                               $18 billion

They decreased Apple and Bank of America but increased ownership of Occidental and Cubb Ltd.

The largest institutional shareholders of Berkshire Hathaway are very respected names such as State Street with $28 billion and BlackRock with $32 billion. Why not buy into a holding company with historical returns that have nearly doubled the S&P if you can?

Let someone else do that hard work so that you don’t have to and if you’re an institutional investor, that’s even better!! Sounds a bit like using TPP.

We're big fans of compounded growth and not many do it better than WB. This is why we have a strategy on our platform that mimics his fund, but with a touch of leverage.

It's a well known fact that over 80% of wealth managers underperform simple market trackers. At TPP we have designed trackers that yield 1.5 x market performance, and designed trackers that follow well known hedge funds.

Combined with our long or flat strategies, and our active equity long/short strategies, we think you have the capability to build an excellent portfolio.

Frustrated with your wealth manager or IFA?

Perhaps TPP is the solution.

‍