Warren Buffet Says Otherwise

If you do any Internet searches on investing you are very likely to come across Warren Buffet and his Berkshire Hathaway investment vehicle.

He is an advocate of very long term holding, so how can I be right when a well respected highly successful investor is saying the opposite?

The answer is simple

He is "building a railway that is intended to last for a few hundred years."

and I am "looking for transit van to move a bit of home furnishing around."

Also "everyone knows" that you should have a very diverse portfolio, yet look at the Berkshire Hathaway portfolio, it is not that diverse. When I last looked nearly half of the portfolio by value was in just four companies; Apple, Bank Of America, Coca-Cola and American Express.

Berkshire Hathaway started life as a textile company, Warren Buffet became a shareholder and by 1964 he was the major share holder but the company was still a textiles company.

It is important to note that at this point Warren Buffet had already secured his financial future, after all he was able to pay something like $15 million for Berkshire Hathaway.

... and as they say that was when $15 million was a lot of money.

Talking about Berkshire Hathaway can be a bit confusing as the company is an investment vehicle, so it owns share and other financial instruments but you can buy shares in it. Class A shares are around $260,000 (gulp) or Class B at around $170 . However the value of Berkshire Hathaway is not particularly bound to the value of its investments as investors may over or under value these investments.

Currently Berkshire Hathaway holds shares worth about $200 billion, obviously this goes up and down by 10s of billions as market prices shift.

These funds tend to be invested in business that pay dividends of around 2%-3% per year meaning that there is $3-$5 billion a year in dividends to invest and other income typically bringing annual income of something like $20 billion.

Does this sound like your fund and this is where the comparison becomes problematic. Berkshire Hathaway has no need to sell its shares to provide a retirement pot at a fixed(ish) date. They just keep reinvesting and letting compound growth make the numbers wonderful.

Over the life of Berkshire Hathaway as an investment vehicle its assets have grown at roughly 20% per year, but since 2000 it has been about half of this at around 10%. The suspicion is that they are so big that there are very few deals left suitable for their large pot, in other words the size of your pot, big or small determines what makes sense to buy.

Whilst we do see the staggering numbers that can come from compound growth, remember that this success has come about by being able to hold and keep the fund going for the best part of 50 years.

From the 2000 accounts
Overall Gain - 1964-2000 ............. 207,821%

From the 2010 accounts
Overall Gain – 1964-2010 ............. 490,409%

From the 2016 accounts
Overall Gain – 1964-2016 ............. 884,319%

Pick a 15 year period which is much more typical of the later in life private investor and the numbers can look a lot different.

As Berkshire Hathaway publish annual reports which include the companies that they invest in you can see what they are buying and selling. But you will find the numbers hard to grasp.

For example when exiting Tesco after only a few years Berkshire Hathaway reckoned that they had lost $444 million.

That there are so few companies that are even worth that amount yet the fund can just shrug its shoulders and carry on should highlight that what works for them probably won't work for the private investor.

Some of their holdings are massive, $11 billion in Amex, almost $17 billion of coca cola, $14 billion in IBM and $27 billion of Wells Fargo.

The lesson to learn is not that holding shares for a long term produces massive growth, but keeping a fund trading for a long time produces massive growth. Something a private investor can not do.