06 Mar Beanz Meanz Heinz
Every year Warren Buffett – the Sage of Omaha, who is widely regarded as the world’s greatest investor, writes a letter to his Berkshire Hathaway company shareholders explaining his strategy, company performance and plans for the future. The letter gives an insight into the investment strategies that have made him extremely rich. Buffett & his business partner Charlie Munger’s strategy has always been to buy great businesses at good prices & hang onto them.
Berkshire Hathaway Holdings
To illustrate a point have a look at some of the businesses that Buffett owns
American Express – Amex is part of what Warren Buffett considers Berkshire’s “Big Four” investments. The other three include Coca-Cola, IBM and Wells Fargo. Berkshire increased its ownership in Amex to almost 14% from 13% in 2012.
Coca-Cola – Global Icon, say no more
Wells Fargo – Buffett and Co. increased their ownership to almost 9% from 7.6% at the end of 2011. He often quotes Mae West, who said: “Too much of a good thing can be wonderful”, or in the words of our own HG Nelson “too much sport is barely enough”
IBM – The final entry in Berkshires “Big Four,” whose earnings amounted to approx. $4.0 billion in 2012. Buffett writes that he expects “substantially greater” earnings from these four companies over time and that Berkshire will likely increase ownership in them in the future. He credits these companies with having “marvelous businesses and are run by managers who are both talented and shareholder-oriented.”
Direct TV – DIRECTV is the first investment made by new investment managers Todd Combs and Ted Weshcler. Their combined holdings at the end of 2012 were valued at $1.15 billion.
Mid American Energy – part of the powerhouse 5 (the five most profitable non-insurance companies in the portfolio and also includes BNSF, Iscar, Lubrizol and Marmon Group). This group has earnings of approx. $10 bn in 2012 (Up $600m on 2011).
BNSF – Buffett notes that BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by truck, rail, water or pipeline. Both BNSF and MidAmerican, Buffett adds, are companies with huge investments in “very long-lived, regulated assets” that get partially funded by long-term debt that is not guaranteed by Berkshire
Omaha World Herald – Who says old media is dead? Warren Buffett maintains a soft spot for newspapers, even as the industry continues to struggle and keep up with the move toward digital media. In fact, Berkshire Hathaway has acquired 28 daily newspapers at a cost of approx. $340 million. The hometown “Omaha World-Herald,” which was bought in 2011 for $150 million is one of two large papers Berkshire Hathaway operated throughout the year, along with “The Buffalo News”. Buffett considers prospects for newspapers to make money will be those in a tight-knit community that wants local news. Buffett said that 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”
Clayton Homes – Clayton owns and services approx. 330,000 mortgages, worth approx. $14 billion, made largely to lower and middle-income families. Buffett says that the loans have performed well, even throughout the GFC. This performance, validates “our conviction that a reasonable down payment and a sensible payments-to-income ratio will ward off outsized foreclosure losses, even during stressful times.” Clayton produced > 25,000 manufactured homes last year, up 13.5% from 2011.
GEICO, Buffett writes, is “the insurer on which I cut my teeth 62 years ago.” Berkshire’s insurance operations delivered a $1.6 billion underwriting gain, the tenth consecutive year of profitable underwriting. In addition, Buffett writes that the insurance companies gave Berkshire “$73 billion of free money to invest” last year.
Elephant Hunting
Buffett is a great “Elephant Hunter” as he proved recently when he invested $48 billion in a joint venture with investor 3G Capital to buy the giant food group Heinz.
Heinz is a typical Buffett target. It has strong brands—not just Heinz, but Classico pasta sauces, ABC soy sauce and Ore-Ida French (and other) fries. These give it a decent chance of standing up to competition from cheaper taste-alikes, including supermarkets’ own-label products. Heinz is also in an easy-to-understand business, a plus in the eyes of the Omaha sage. And it will sit naturally alongside Coca-Cola and Procter & Gamble, two of the biggest holdings of Berkshire Hathaway, Mr Buffet’s holding company
Buffett said that while some of his investments failed, he predicts Berkshire Hathaway will own Heinz 100 years from now. Heinz is forever, as far as we’re concerned,” he said. “So it’s back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants.”
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