Investing Themes from Warren Buffett

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In his highly anticipated letter to shareholders, the Oracle of Omaha drops little gems for his readers. This year the Chairman of Berkshire Hathaway (NYSE: BRK-B) didn't disappoint either. Here are some of the notable investing themes and tips from Mr. Buffett. 

1. Buffett Still Likes Big Blue and Wells Fargo

Of the "Big Four" investments in Berkshire's common stock portfolio, the company continued to ramp up purchases of International Business Machines (NYSE: IBM). As a result, Berkshire now owns roughly 6% of Big Blue, and this will notch up higher as IBM has a massive share repurchase plan in place. IBM bought back shares worth $12 Billion in the last year, which was a key driver for the stock price. 

Buffett likes Wells Fargo (NYSE: WFC) a lot and added more shares recently. In fact, Wells Fargo ousted Coca-Cola to be largest common stock holding in Berkshire's portfolio. And rightly so, the conservatively managed bank has been hitting record net income numbers while improving its ROE simultaneously, it is even buying back shares as well. Berkshire now owns more than 8.7% of Wells Fargo, which is almost certain to go up in the near future.

2. Ever Optimistic About the US

Buffett has always been one of the most vocal proponents of the country's bright future, even during economic downturns. And his optimism continues, Berkshire spent $9.8 Billion on plant and equipment in F'12, 88% of which was in the U.S.

And he expects to spend even more in capital expenditures in 2013. In his words, "The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well. "

3. Investment Managers Are Outperforming

Berkshire’s new duo of investment managers, Ted Weschler and Todd Combs are doing very well. In fact, both of them outperformed the S&P 500 by more than 10%, and did better than Mr. Buffett himself. As a result, the fund allocation to each has been notched up to roughly $5 billion. As a result, both Todd and Ted now have a much bigger say in Berkshire's oversized portfolio. 

The duo will certainly do well over time, and their largest bet has been on DIRECTV, in which the combined holdings of both at year end 2012 were worth $1.15 billion. Investors should take heed; the duo will almost certainly take on the CIO role in the post-Buffett era. 

4. Berkshire Hathaway Is the Best Mutual Fund in the World?

This phrase has been coined numerous times before, and rightly so. Unlike numerous other mutual funds, there is no front-load or back-end fees, management fees, marketing fees etc. And even better, Berkshire Hathaway doesn't engage in high volume trading that many mutual funds do, often to align themselves with an index or their own investment mandate, both of which impact the performance. 

However, the main reason why this mutual fund comparison is true, because Berkshire performs better during market down-turns, which represents a great hedge. Buffett puts it in his own way, "We do better when the wind is in our face".

5. A Sweetheart Deal

In the recently acquired H.J. Heinz deal, Buffett once again put his negotiation skills to good use. Berkshire will put up $4 billion to own 50% of a holding company, and the rest 50% will be owned by 3G Capital for another $4 billion. Berkshire will invest another $8 Billion in preferred stock with a 9% yield.

However, the preferred stock has a couple of major sweeteners for Berkshire, the preferred stock will be redeemed in the future at a significantly higher price and also comes with warrants that enables Berkshire to buy 5% of the holding company's stock for a nominal price. 

6. Floating on Money

The rocket fuel behind Berkshire Hathaway's engine has always been the float coming in from its insurance businesses. And consequently, it is the reason why the firm is undervalued. Buffett states it succinctly,

"So how does our attractive float affect the calculations of intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were unable to replenish it. But that’s an incorrect way to look at float, which should instead be viewed as a revolving fund. If float is both costless and long-enduring, which I believe Berkshire’s will be, the true value of this liability is dramatically less than the accounting liability. A partial offset to this overstated liability is $15.5 billion of “goodwill” that is attributable to our insurance companies and included in book value as an asset." 

7. Local Newspapers Still Reign Supreme

In the last fifteen months, Berkshire acquired 28 newspapers for $344 million. This may seem surprising to some investors, due to Buffett's own acknowledgement that newspapers are in a secular decline in terms of circulation, ad revenue and profits. However, the reason why he bought newspapers are due to the economics of local news companies. In his own words, Buffett states,

"If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end."

Buffet does expect most of his daily newspapers to be profitable for a long time to come. Both he and Charlie Munger like the newspaper business, and will continue to look for more newspapers to acquire at a low P/E multiple.

The Takeaway

With a line-up of some of the best companies and assets in the world, along with the best possible management, it is certain that Berkshire Hathaway will beat the market over long periods of time. The company never underperformed the S&P 500 over a five- year stretch, and it is likely to remain that way. 



ishfaque has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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