Is Buffett Losing His Edge?

By Joe Ponzio on July 9, 2007  |  5 comments

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.

Also Filed Under "Miscellaneous"

• Notes from the Pabrai Funds 2008 Annual Meeting
• Leaving For Omaha; Berkshire Updates
• Hedge Funds and the Early Buffett Partnership
• What's On Your Mind