As Berkshire Hathaway shareholders settle in to the CenturyLink Center Omaha today to hear Warren Buffett talk about money, they can celebrate a financial first: owning $100 billion worth of common stock.
Berkshire passed that landmark in 2013. Now totaling about $115 billion, the portfolio's value tripled in the past decade, and it's up 30,789 times from Berkshire's 1967 stock holdings.
And that track record is why the annual shareholders meeting is expected to draw some 35,000 people to hear hours of questions and, most important, the answers from Buffett and Berkshire Vice Chairman Charlie Munger.
Live coverage: Our live chat begins at 7:30 a.m. and continues through the question-and-answer session with Warren Buffett and Charlie Munger. At 5 p.m., join a post-meeting chat with World-Herald Berkshire Hathaway reporter Steve Jordon. Omaha.com/Berkshire
“I've never set numbers as goals on anything,” Buffett told The World-Herald. Building a $100 billion portfolio is “nice,” he said, “but I'm always focused on the next day. I've never had a number in mind for sales or net income or market penetration.”
Buffett-watchers say Berkshire has built one of the world's largest portfolios of stock through Buffett's systems of raising money and investing.
The growing value of the shares, including a one-third boost last year, is the result not only of the shares' market price increases but also profits from Berkshire's 80-plus operating companies, at the rate of about $1 billion a month.
More investable cash comes from premium dollars collected by Berkshire's property insurance companies. That “float” totaled $77 billion at the end of 2013 and can be invested until claims arise.
It's like a revolving bank account, Buffett said in his annual report to shareholders. Money goes out to pay insurance claims, but even more — $3 billion more last year — arrives from insurance policy premiums.
Berkshire also has $48.9 billion in cash, which could be used to buy securities as well as to acquire whole companies.
“We don't keep cash because we like it,” Buffett said. “Nothing makes me less happy than cash, unless it's the lack of cash at the wrong time.
“Every day I come to work, I'm thinking about what makes the most sense for Berkshire. Obviously, events change from day to day, prices change from day to day, opportunities change from day to day.”
Buffett said Berkshire will always hold stock in sound businesses.
“You need a lot of marketable securities, just to carry out the property-casualty insurance business,” he said. “There's a limit someplace. ... We haven't reached it yet. But it does become more difficult as you get larger.” On the other hand, he said, “there are certain opportunities you don't get unless you are larger.”
He noted: “We found ways to invest quite a bit of money last year,” including stock worth $1.2 billion in IBM and $1.35 billion in Wells Fargo. “Every year will be different, and we'll have some dry spells, but the game isn't over.”
Berkshire managers Ted Weschler and Todd Combs help put the cash to work by buying stock in other companies, with each managing $7 billion for Berkshire.
It all belongs to Berkshire and its shareholders. In contrast, money in mutual funds belongs to investors who want steady gains and who can pull out their money at the first whiff of a market decline.
That ownership is an inherent advantage for Berkshire, said Vitaliy Katsenelson, chief investment officer at Investment Management Associates Inc. of Denver.
“It's permanent capital,” Katsenelson said. “Buffett makes decisions that are going to be good for Berkshire in the long run. Even if in the short run they're not working out, that money is not going to leave them. A lot of good investment decisions in the long run come with short-term pain.”
Mutual fund managers, on the other hand, must keep short-term consequences in mind because they are required to pay back investors' money upon request.
“They are forced to have short-term time horizons,” Katsenelson said. “They need to have good performance in three months, six months, a year. That's how they get compensated because that's how the money flows in and out of the funds.”
Buffett, on the other hand, can make decisions with decades in mind, Katsenelson said. “If he doesn't perform as well in the short run, nobody's going to pull the money away from him. ”
In an interview, Buffett said Berkshire's strong financial position means he can't be pressured into buying or selling something.
“We might do some dumb things, but it won't be because we've been forced into it,” he said.
That long-term view fits with Buffett's philosophy of buying relatively few stocks but investing heavily when he spots a potential winner.
In 2003, Berkshire owned $30 billion worth of stock in 10 companies: American Express, Coca-Cola, Gillette, H&R Block, health care provider HCA Inc., M&T Bank, Moody's, PetroChina, the Washington Post and Wells Fargo. An additional $5 billion was invested in a few dozen businesses.
Now, 15 companies account for about $100 billion in Berkshire-owned stock. American Express, Coca-Cola, Moody's and Wells Fargo are still on the list, joined by DirecTV, Exxon Mobil, Goldman Sachs, IBM, Munich Re, Phillips 66, Procter & Gamble, Sanofi, Tesco, U.S. Bancorp and Walmart.
The remaining $20 billion is split among about 30 other companies, a list that includes M&T Bank and some former holdings of the Washington Post.
That's an “unusually concentrated” number of companies for a portfolio that size, said Whitney Tilson, founder and manager of Kase Capital Management in New York City.
“It's hard for me to think of any portfolio of money even remotely that size that's concentrated in that fashion,” Tilson said. “But that's what he's done most of his career. He moves infrequently, only when he has high conviction, and he bets big. Obviously, that only works if you know what you're doing, and he does.”
Berkshire's “permanent capital” advantage showed during the 2008-09 downturn in stock prices, Tilson said. Shares owned by Berkshire dropped in value, as did nearly every other stock.
“Buffett at no time was under any pressure to liquidate those stocks,” Tilson said, “whereas pretty much every other money manager on the planet was either liquidating or worried about having to liquidate.”
For the future, the chances of Buffett buying significant amounts of company stocks would be greatest if the stock market declines, a price “correction” that many people expect, said Jeffrey D. Stacey, founder of Stacey Muirhead Capital Management Ltd. of Waterloo, Ontario, Canada.
“He's sitting on a lot of cash he could deploy for more securities,” Stacey said. Although Buffett prefers to own entire companies, “if the market corrected, that would tilt the balance in favor of increasing marketable securities.”
Tilson said he expects Buffett, 83, to run Berkshire for at least five more years. When he's gone, Berkshire won't perform as well, even if his successor managers are just as good picking stocks, Tilson said.
“His successors just simply won't be able to do the deals that Buffett is able to do on the terms that Buffett is able to get, even if they are just as good at valuing deals and knowing which ones to say yes or no to,” Tilson said.
Last year's 50-50 percent purchase of H.J. Heinz Co. with Berkshire and 3G Capital of Brazil is an example of Buffett's unique value to Berkshire, Tilson said. The deal grew out of his longtime relationsip with Jorge Paulo Lemann.
Bank of America, General Electric, Goldman Sachs and others called during the 2009 financial crisis and were willing to give Buffett better terms than they would have gotten elsewhere because they wanted his “stamp of approval,” Tilson said.
“I think Buffett gets a lot of phone calls for two reasons: Personal relationships over a lifetime, and because of his brand name. ... Those things are irreplaceable.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.