The shocker is this: Berkshire Hathaway’s portfolio of equities—the stocks such as Coke (KO) and P&G (PG) and Washington Post (WPO) that Warren Buffett himself, the “Oracle of Omaha,” famously purchased over the years at bargain prices—appears, as of yesterday’s market close, to be worth not much more than Buffett's cost . . .
Yet the fact is, the value of Berkshire’s equity portfolio is not only of enormous economic importance to Berkshire Hathaway and its shareholders, but to investors around the world who watch what Warren does and frequently imitate his moves.
And the fact that it appears to be right back to its cost basis—after decades of not—is startling.
I don't disagree with his facts or his calculations, but rather with what he appears to be implying: That after years of work building a common stock portfolio that appreciated greatly over time, Buffett is now right back where he started.
It's difficult to draw any conclusions about the aggregate market value of the portfolio relative to its cost basis because much of the portfolio is recently purchased, and because the cost basis column in the report does not break out which "vintage" a given purchase belongs to--they are all lumped together. Of the 14 positions named, eight were purchased in the past few years, representing one half of the total cost basis of the portfolio. To say that this portfolio within a portfolio is below its cost is true but not very meaningful, certainly not "jaw-dropping" as Matthews writes, and has nothing to do with the words "over the years" and "decades." If I start out penniless and build a company that I eventually sell for a billion dollars, then invest the proceeds in stocks that decline by 20% in a year, then my current portfolio is worth way less than its cost basis; but I've still gone from 0 to 800 million.
Of the remaining six positions, which Berkshire has indeed held for years, three (Coke, P&G [formerly Gillette, whose cost basis was grandfathered in when it merged with P&G], and the Washington Post Company) are still way above Berkshire's cost basis, so Matthews' point does not apply to them.
Only the remaining three, all financials--Amex (AXP), US Bancorp (USB), and Wells Fargo (BWF)--are good examples of what Matthews was trying to say. He's owned them all for a long time and, dividends aside, now has little to show for it. Which perhaps counts as "jaw-dropping," but nevertheless is a more modest statement than the one he makes.
Hat tip to Felix.
Disclosure: Long Berkshire Hathaway.
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Pilgrimage to Warren Buffett's Omaha: A Hedge Fund Manager's Dispatches from Inside the Berkshire Hathaway Annual Meeting by Jeff Matthews
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