QUALIPORT
Why Buffett Is Boring

By Maynard Paton (TMFMayn)
March 8, 2004

Warren Buffett's annual reports ain't what they used to be. In years gone by, the US stock market legend used to pepper his shareholder letters with great common sense advice for the small investor. No longer. This year's effort sadly follows a recent trend -- it's boring.

Sure, Buffett writes his reports first and foremost for Berkshire Hathaway (NYSE: BRK.A) shareholders. But why can't he expand on some of the more interesting stuff and, in particular, his common stock holdings?

Alongside the usual array of Berkshire-specific topics, this time shareholders were faced with their chairman's thoughts on taxes and corporate governance. Last year, it was a rant about derivatives and yet more corporate governance. And the year before that, observers were told of insurance reserving and junk bonds. All very informative no doubt, but of little practical use for the man-in-the-street share picker.

Gone are the times when Buffett waxed lyrical about the competitive strengths of some of his common stock favourites, notably Coca- Cola (NYSE: KO), Gillette (LSE: G) and American Express (NYSE: AXP). These days, shareholders are given the list of holdings and just two short paragraphs:

Company	Cost         ($m)	Market value           (31/12/03)                    ($m)
American Express (NYSE: AXP)	1,470	7,312
Coca-Cola (NYSE: KO)	1,299	10,150
Gillette (NYSE: G)	600	3,526
H&R Block (NYSE: HRB)	227	809
HCA (NYSE: HCA)	492	665
M&T Bank (NYSE: MTB)	103	659
Moody's (NYSE: MCO)	499	1,453
PetroChina (NYSE: PTR)	488	1,340
Washington Post (NYSE: WPO)	11	1,367
Wells Fargo (NYSE: WFC)	463	3,324
Others	2,863	4,682
Total Common Stocks	8,515	35,287

"We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody's in 2000. Brokers don't love us.

We are neither enthusiastic nor negative about the portfolio we hold. We own pieces of excellent businesses – all of which had good gains in intrinsic value last year – but their current prices reflect their excellence. The unpleasant corollary to this conclusion is that I made a big mistake in not selling several of our larger holdings during The Great Bubble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I."

The scant common stock coverage is probably due to the fact that they no longer dominate Berkshire's accounts (though they're still worth $35b) and, as Buffett indicates, he's not doing much trading. But two of the purchases -- HCA (average buy price: $31.79) and PetroChina ($0.21) -- should have prompted further comment.

It appears Buffett's HCA purchase was a falling knife job. The operator of US hospitals and other healthcare facilities issued a profit warning in April 2003, citing a 'significant decline in pulmonary and flu-related admissions... due to a weak flu season'. The Berkshire boss dived in during the following two weeks and has since seen the stock run up nearly 30%. In terms of valuation, a price to earnings (P/E) ratio of around 13 was paid.

PetroChina hardly fits the traditional Buffett 'consumer franchise' mould. And it's not even American, which is customary for Berkshire investments. Still, China's largest oil producer has some big attractions: it will surely benefit from growing Chinese prosperity and (at current prices) boasts what seems to be a remarkably decent P/E of 10 and 4% dividend yield. Buffett's already seen his holding (bought in early 2003) more than double.

It's disappointing that Buffett did not take the opportunity to expand on these falling knife and emerging market purchases. It's fair to say many (if not most) of Berkshire's shareholders are also active investors and the reasoning behind such investments would be very illuminating. Instead, Buffett followers get to read, among other acquisition stories, the folksy tale of how the Berkshire chairman stumbled across Clayton Homes, a house builder that his group bought outright.

What Buffett must realise is that, if his fans want to improve their own investment skills, they'll struggle with talk about wholly owned Berkshire subsidiaries. Their financial information is limited, unlike listed companies, where the accounts and fundamentals can be evaluated far more easily and have shares that can actually be bought. For the record, Clayton was acquired for around $1.7b in 2003; Berkshire's HCA and PetroChina stakes are now worth $2.0b.

It's not too surprising, therefore, to read Buffett asking why he didn't sell during The Great Bubble. Perhaps if he wrote more about his common stock holdings, he wouldn't have missed the selling opportunity.

More: Berkshire Hathaway Shareholder Letters | The Contradictions Of Warren Buffett | Five Big Buffett Mistakes