Back in May, Todd over at ValuePlays threw out a challenge to his visitors-explain why Buffett is no longer investing 10%, 20%, or more of Berkshire’s assets into any one company, like he did with Coca-Cola in 1988. With all due respect to Mr. Buffett’s track record, Todd has a valid point-Berkshire Hathaway isn’t buying massive stakes in relation to his company’s size.
Does this mean we should be diversifying too-buying less of each company…and more companies? Does Buffett finally see that value in Wall Street’s “diversification” advice?
Not exactly. Let me rephrase that-not at all. Instead, the securities laws are starting to work against him. Though still capable of buying 10% or more of many companies, he just can’t do it anymore.
Investment Size
Back in 1988, when Buffett bought $592 million of Coca-Cola, Berkshire Hathaway was a $2.8 billion company. His purchase represented 21% of Berkshire’s assets. Earlier this year, when he bought $1.5 billion of Johnson & Johnson, it represented less than 2% of Berkshire’s assets. Though his purchase of Johnson & Johnson was nearly three times larger, it represented a much smaller portion of his now $91 billion company.
Opposing Forces
If an investor wants to take a large stake in a company, he or she has two forces working against the trade. On the one hand, institutional investors have to report their holdings every three months. To sneak a large amount of money into a company, an investor has three months to do so-before everyone else finds out about it and moves the stock price up or down.
On the other hand, these investors are limited as to how much stock they can quietly buy or sell on any given day. If they trade more than 1% of the average trading volume of the stock, they have to report it to the SEC, which then makes it public knowledge. Not a good way to stay under the radar.
What This Means For Buffett
By virtue of law and size, Buffett can not make super-large plays anymore. To do so would require him to report those plays to the SEC as they are happening, tipping off investors and pushing the stock price to a level where he could no longer buy it. Imagine what a company’s stock price would do if Buffett announced that he was investing 21% of Berkshire to acquire $19 billion of it. If you can’t imagine it-the price would shoot through the roof.
What This Means For You
There’s a lesson here for you-don’t be afraid to invest 21% of your portfolio into a wonderful company-a company like Coca-Cola in 1988. And don’t be upset when you have $91 billion and investing becomes somewhat difficult.
Filed under: Miscellaneous
Just can’t help but comment on the comment above. I feel the Berkshire tradition will definitely continue, if Wall st however views the transition temporarily as bad, that would be a brilliant buying opportunity. Just my two bits 
Regards,
Sanjay Shetty
I blog at: http://indiainvestor.wordpress.com/
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Berkshire owns some of the greatest investments in the world. Munger and Buffett will certainly choose a worthy successor. Still, no successor will be able to employ $200 billion at super-high rates of return. Even Buffett himself is having a problem doing so.
Over the next 40 years, Berkshire will continue to be a great company. Its growth will certainly slow because it has to acquire super-large companies and each position it acquires has a smaller and smaller impact on its overall portfolio. As Berkshire continues to swell, its growth rate will eventually level out to be close or equal to the overall growth rates of its internal businesses.
When that finally happens (be it two or ten years from now), you can likely expect a 10% to 12% long-term return – or whatever the internal growth rates of its aggregate businesses are.
Keep in mind: An arbitrage play that brings in $100 million is wonderful – except when that $100 million only brings your $220 billion portfolio up a mere 0.0455% – at which point you need to ask: Is this arbitrage play even worth the risk and/or time and/or effort?
That is likely a question that Buffett is finding himself asking a lot these days.
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Buffet himself stated that his role will be split in two. In a recent TV interview he stated the role of investing/capital allocation will go to one of four large mutual fund managers who said they would come tomorrow to run the Berkshire portfolio. That makes sense.
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Oh to have problems like that,lol’
What are your thoughts on BRK after Uncles’ Warren and Charlie aren’t around anymore?
I have complete faith that they will choose successors who will continue the great Berkshire traditions, but it might be more about how Wall St views the transition.
Your thoughts?
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