According to Malcolm Gladwell, mastery of an activity requires an investment of 10,000 hours. At just three hours a day Buffett would have easily mastered investing, since he started at age 11.
What’s a retail investor to do?
One could just buy Berkshire Hathaway Inc. (NYSE:BRK.A), a proxy for several industries: insurance, housing, fast food, transportation (specifically the railroads), media, and his five top-performing non-insurance companies: BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy, thus creating in one fell swoop a fairly diversified portfolio. Making it a core holding wouldn’t be a bad idea at all, but your portfolio needs something besides insurance.
It might surprise new investors that Berkshire Hathaway Inc. (NYSE:BRK.A) has no yield, with no plans to offer one either, something Buffett himself has declared. Buffett prefers to plow profits back into the business or buy back shares at a reasonable price, which the company did in 2012 to the tune of $1.3 billion.
However, even mighty Berkshire Hathaway Inc. (NYSE:BRK.A) hasn’t managed to keep up with the S&P 500’s gains in the last four years. As Buffett points out in his Letter to Shareholders from 2012,
For the ninth time in 48 years, Berkshire’s percentage increase in book value was less than the S&P’s percentage gain (a calculation that includes dividends as well as price appreciation. In eight of those nine years, it should be noted, the S&P had a gain of 15% or more.
Should you buy Berkshire? I think anyone can buy Berkshire Hathaway Inc. (NYSE:BRK.A) and sleep soundly at night; this underperformance in 2012 is rare for the company. Succession issues have been laid to rest after Mr. Buffett’s cancer diagnosis last year, assuring shareholders that there was a plan at the ready.
“Every Storm Runs Out of Rain”
Buffett mentioned the title of Gary Allan’s country song as his approach to capital expenditures, outlaying $9.8 billion on plant and equipment improvements in 2012. He decried CEOs who don’t know what to do with cash from record profits.
But not the CEOs of his four favorite companies and largest stock holdings: Wells Fargo & Co (NYSE:WFC), The Coca-Cola Company (NYSE:KO), American Express Company (NYSE:AXP), and International Business Machines Corp. (NYSE:IBM). Berkshire doesn’t report its share of these company’s earnings on its balance sheet ($2.8 billion), but does report dividends, which amounted to $1.1 billion in 2012.
Berkshire still continues to buy more of his “Big Four,” as he calls them. If you would rather not buy Berkshire Hathaway Inc. (NYSE:BRK.A) for whatever reason, all four of these companies would be good alternatives.
Buy what you know
The Coca-Cola Company (NYSE:KO) is Buffett’s favorite beverage and second biggest position, at 19% of his portfolio. However, Americans are consuming less soda, and this was mentioned at their latest disappointing earnings release with a drop in revenue of 2.57% from the year-ago quarter. Despite selling off, it recovered its losses within several trading days, showing its strength as a stock. It did meet earnings expectations of $0.63 per share, after all.
An iconic brand, the company is experiencing a hiccup (pun intended) in emerging markets like India and China. Brazil also disappointed, but that country’s tough financial situation has been mentioned in several companies’ earnings calls. Still, The Coca-Cola Company (NYSE:KO), maker of still and sparking beverages, dominates over 40% of the North American soda space, though it’s a space that is seeing continuing yearly declines. It has an 18.42 forward P/E and a yield of 2.70%.
Famously skirting the dot.com boom (and bust) with his well-known aversion to tech, Buffett is very familiar with International Business Machines Corp. (NYSE:IBM). IBM, the global provider of IT products and services, fits the Buffett formula of global reach, time-tested business model and management, and competitive advantages. It’s Buffett’s third largest position at 17.1%.
International Business Machines Corp. (NYSE:IBM) has pulled back from 52-week highs after a disappointing Q2 earnings release on July 17, reporting a 13% drop in diluted EPS to $2.91 and a 17% slide in net income to $3.2 billion. However, the company’s gross profit margin increased by 1.0 point to 48.7% and generated free cash flow of $2.7 billion.
The most interesting tidbit was that cloud computing revenue was up a stunning 70%! International Business Machines Corp. (NYSE:IBM) has a 13.75 trailing P/E and 1.90% yield with the PEG at 1.08.
Wells Fargo & Co (NYSE:WFC) is Buffett’s main financial position at 19.9%, and it has rallied along with the US housing market. Fundamentally more of a bargain than IBM, its trailing P/E is 12.05 with a 2.70% yield. However, with Wells Fargo’s PEG at 1.69, International Business Machines Corp. (NYSE:IBM) will grow faster. But Wells Fargo & Co (NYSE:WFC) isn’t mired in the US, announcing its intent to buy Eurohypo UK, a European retail lending operation for $6 billion, to expand overseas operations.
Wells Fargo reported earnings on July 12, beating on both top and bottom lines, reporting $0.98 EPS and $21.38 billion in revenue. However, they also reported a disturbing trend lower in mortgage originations in the US. Wells Fargo & Co (NYSE:WFC) controls almost a quarter of US home mortgage originations, and signaled they could decline further.
Fearful or greedy?
International Business Machines Corp. (NYSE:IBM) sold off after its latest release and greedily buying the dip is a good idea considering its low P/E and yield. The Coca-Cola Company (NYSE:KO) is less favored, as soda consumption trends just can’t be turned around. Wells Fargo & Co (NYSE:WFC) is the least favored, as it is the most exposed US bank to home financing and a name to be fearful of. Or just buy Berkshire Hathaway Inc. (NYSE:BRK.A) and go about your merry way.
The article Why Warren Bufffett Will Always Outperform You originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines, and Wells Fargo. AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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