QUALIPORT
Learning From Buffett

By Maynard Paton (TMFMayn)
November 28, 2002

When you think of Warren Buffett and his investment style, what immediately springs to mind? Buy for the long term? Look for consumer monopolies like Coca-Cola (NYSE: KO)? That's the recipe for successful investing given to ordinary investors by the Qualiport, numerous books and even the odd investment publication.

In an attempt to discover whether the high-profile purchasing of consumer franchises for the long term is actually fully representative of Buffett's investment approach, I've recently been perusing Buffett's Shareholder Letters and the book The Warren Buffett Way.

I've clearly found that making the occasional large long-term bet on his favourite "economic franchise" is the foundation of Buffett's success. In addition, most of Buffett's wealth has been generated by businesses he has bought in whole, and as such, will be owned for a lifetime.

However, when it comes to marketable equities that the ordinary investor can purchase, I would suggest that purchasing a consumer monopoly and holding for the long term is the investing exception, rather than the rule.

Indeed, Buffett's record shows a liking towards the short-term investment. And the nature of many of the companies bought doesn't instantly fit the Coca-Cola mould either.

Stock picks

Ever since 1977, Berkshire Hathaway (NYSE: BRK.A) has disclosed its major common stock holdings. The full list of the stock picks is shown below. Also bear in mind that Buffett had full knowledge of the superior investment qualities of the "economic franchise" and the benefits of the long-term hold when making every purchase.

  Company                 Business            First      Years
                                            Disclosed    held


  Washington Post*        Publishing            1977       25
  GEICO*                  Insurance             1977       25
  Walt Disney             Broadcasting          1984       15
  Coca Cola*              Beverages             1988       14
  Freddie Mac             Financial Services    1988       12
  Wells Fargo*            Banking               1990       11
  Gillette*               Toiletries            1991       11
  Interpublic             Advertising           1977        8
  Handy & Harman          Metals and Mining     1979        8
  American Express*       Financial Services    1994        8
  Affiliated Publications Publishing            1979        7
  Ogilvy & Mather         Advertising           1977        6
  General Foods           Food                  1979        6
  Media General           Publishing            1979        5
  Kaiser Aluminum         Metals and Mining     1977        4
  SAFECO                  Insurance             1978        4
  RJ Reynolds             Tobacco               1980        4
  Time                    Publishing            1982        4
  Guinness                Beverages             1991        3
  Knight-Ridder           Publishing            1977        2
  ABC                     Broadcasting          1978        2
  FW Woolworth            Retail                1979        2
  ALCOA                   Metals and Mining     1980        2
  Pinkerton's             Professional Services 1980        2
  Cleveland-Cliffs Iron   Metals and Mining     1980        2
  General Dynamics        Aerospace             1992        2
  Capital Cities          Broadcasting          1977        1
  Kaiser Industries       Metals and Mining     1977        1
  Amerada Hess            Oil                   1979        1
  National Detroit        Banking               1980        1
  Times Mirror            Publishing            1980        1
  National Student Mktg   Financial Services    1980        1
  Arcata                  Paper                 1981        1
  GATX                    Machinery             1981        1
  Crum & Forster          Insurance             1982        1
  Exxon                   Oil                   1984        1
  Northwest Industries    Diversified           1984        1
  Beatrice                Food                  1985        1
  Lear Siegler            Aerospace             1986        1
  Gannett                 Publishing            1994        1
  PNC Bank                Banking               1994        1
  McDonalds               Restaurants           1996        1
  Travelers               Financial Services    1997        1
  H&R Block*              Financial Services    2001        1
  Moody's Corporation*    Financial Services    2001        1

  (* currently a disclosed holding)

A few clarifications before going any further:

• Berkshire Hathaway doesn't disclose equity holdings that have a market value below a certain level. Thus I've assumed that once a company appears as a holding or ceases to be reported, it's effectively a "buy" or a "sell" decision by Buffett.

• Certain stocks were bought by another company via a takeover. Given that Buffett reinvested (as far I can see) in only one of the predators (see below), I've taken all of the cash-in-on-the-bid decisions as a "sell".

• Buffett's eventual ownership of Walt Disney (NYSE: DIS) came through the share purchase of the US television network ABC in 1984. ABC merged with fellow broadcaster Capital Cities Communications in 1986, which in turn merged with Walt Disney in 1996. It's interesting to also note that Buffett bought Capital Cities in 1977 and sold a year later. He also held ABC for just two years in the early eighties, before his repurchase in 1984.

• GEICO became a full subsidiary of Berkshire Hathaway in 1996 and thus is no longer disclosed as a common stock holding. But as the company is obviously still owned by Buffett, I've deemed it as a "current disclosed holding" for this exercise.

Short-term investor

Some interesting points are raised from the above table. Buffett has disclosed 45 different common stocks in the last 25 years. And the average holding period since 1977? Just 4.76 years.

Of course, Buffett held some of the stocks prior to 1977. So if we consider those 37 stocks bought after 1977, the average holding period declines to 3.84 years. And if we consider those 30 stocks that were bought after 1977 and subsequently sold, the average holding period declines again, to 3.23 years.

Top-ups and profit-taking

But what about Buffett's top-ups? Surely he's been adding to his long-term holdings over the years and boosting the average holding period. Well, sort of.

Surprisingly, Buffett has never materially added to his Washington Post (NYSE: WPO) position since 1977. Nor has he added to his Gillette (NYSE: G) holding since its initial purchase in 1991. After topping-up every year between 1977 and 1980, Buffett's GEICO holding was left untouched until 1996, at which point he bought the whole insurance company.

The other three current holdings, Coke, American Express (NYSE: AXP) and Wells Fargo (NYSE: WFC), all seen two subsequent purchases after the initial stake was bought.

However, if we try and take into account his "core holding" top-ups, we have to consider Buffett topping-up his short-term "side bets" too. And if we're considering the top-ups, what about when Buffett locks in part of his profits? Surely profit-taking then must count as a "sell".

Suffice to say, it all can get horribly confusing. But overall, I'm quite sure that Buffett's average holding period for a common stock is around the 3-4 year mark. It's certainly way off the ten-year mark widely purveyed as his long-term benchmark.

Commodity businesses?

The types of businesses purchased also raises an eyebrow. Alongside those operators in familiar Buffett-type industries, such as insurance and media, metal and mining firms have also taken the Sage of Omaha's fancy. Metal-bashers Handy & Harman, Kaiser Aluminum (NYSE: KLU) and the Cleveland-Cliffs Iron Company (NYSE: CLF) are not the companies typically laid down in Buffett folklore.

I suspect short-term value was the investment strategy behind most, if not all, of these holdings. Unless, that is, they were like Guinness and were investment mistakes.

Infrequent purchases

Let's also look at Buffett's frequency for purchasing his major long-term holdings.

Company               First Bought    Purchase comment


Washington Post         1973          Deep recession
GEICO                   1976          Brink of bankruptcy
Walt Disney             1984
Coca-Cola               1988
Freddie Mac             1988
Wells Fargo             1990          Suffering one-off losses
Gillette                1991
American Express        1994 

Eight long-term market-beating purchases were made over 28 years. Three of these were made when the stock market was feeling deeply pessimistic about the company's prospects.

What can we learn?

Here are my thoughts from the research:

• The company that can be bought for the long term is the investment exception not the rule. Of the 45 different purchases made by Buffett, 35 were sold within ten years. Most went in under five. That said, of his current 8 holdings, each has been owned for an average of 12.1 years.

• Great long-term businesses are rarely attractively valued. Buffet has made 10 prospective long-term purchases (i.e. those shares held for 10-plus years or currently owned) in 29 years. For each of those, held for an average of 12.4 years, an average of 1.3 top-ups have been made since the original purchase. Compare all this to the Qualiport. We've bought 14 different companies, each with a long-term horizon, in under five years.

• Concentrate on certain sectors or industries for long-term selections. Most of Buffett's picks fall into three distinct groups -- media, finance and branded consumer goods. Define a strict circle of competence. The Qualiport's 14 different stock picks have covered at least six different sectors.

This article is an updated version of a Qualiport feature run last November.