The 30 Stocks in the Buffett Portfolio

It's a happy time of year for  Berkshire Hathaway (BRK.B) shareholders and Warren Buffett watchers. Berkshire, of course, is the holding company run by Buffett, one of the all-time great investors. In a few days Berkshire Hathaway will release its 2003 shareholder report (Saturday, March 6, to be exact), which contains both Berkshire's full-year results and a lengthy commentary from Buffett. And in mid-February, Berkshire filed its 13F reports with the SEC. A 13F form details the equity holdings of large institutional investors, including insurance companies like Berkshire Hathaway. These 13Fs give us a periodic peek inside of Berkshire's equity portfolio.

Once Berkshire's annual report comes out, we'll be updating our Analyst Report on the stock. Here, we examine the equity portfolio.

If it were a mutual fund, Berkshire's equity portfolio would rank ninth-largest among domestic-equity funds, right on par with  Fidelity Contrafund (FCNTX) and  Dodge & Cox Stock (DODGX), and about one third the size of  Vanguard 500 Index  (VFINX). But whereas most funds would spread those assets among a hundred or more holdings, Berkshire concentrates them in just 30 stocks.

These stocks are listed below, but if you'd like to track and analyze them yourself, click here to create a watch list. After clicking, simply name the portfolio and click continue. (If this link does not work, please register with Morningstar.com--registration is free--or sign in if you're already a member, and try again.) This will allow you to save and monitor these holdings within our Portfolio Manager.

Most of these 30 stocks aren't Buffett's picks. Many of them are holdings of Lou Simpson, who manages the equity portfolio at Geico, Berkshire's big auto-insurance subsidiary. Buffett and Simpson share similar investment styles--buying high-return businesses, focusing on best ideas--and they operate independently of each other. Simpson's one heck of an investor in his own right. 

Since I wrote the first version of this piece about a year ago, Buffett and Simpson have made several changes on the periphery. New names include  Automatic Data Processing (ADP), HCA-The Healthcare Company  , and Cadbury Schweppes (CSG). Gone are  Best Buy (BBY), Dun & Bradstreet , Great Lakes Chemical , Jones Apparel Group , and PNC Financial Services Group (PNC). Berkshire has also reduced its stakes in several holdings from a year earlier. Those include  Gap (GPS), Dover (DOV),  First Data ,  Iron Mountain (IRM), Mueller Industries (MLI),  Sealed Air (SEE), and Zenith National Insurance .

Market-Timing, Berkshire Style
The first thing to note about Berkshire's equity portfolio is that it has been shrinking, both in absolute terms and relative to other investments. Buffett has bought very few stocks over the past six years, which isn't surprising given his negative view of stock-market valuations during and after the bubble. As he wrote in Berkshire's 2002 shareholder letter, which was released in March 2003: "Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge."

Of course, stocks have risen sharply since Buffett wrote those words, so it's no surprise to see fewer stocks in the portfolio than a year ago. Instead of stocks, Buffett has been buying bonds and entire operating businesses.

Berkshire's Asset Allocation ( % )
Investment Breakdown	1997	1998	1999	2000	2001	2002	2003*
Cash	2.0	17.5	5.0	5.5	5.7	9.4	22.0
Bonds	20.7	27.4	39.2	33.8	38.8	34.6	22.1
Publicly Traded Equities	72.9	51.3	51.2	39.0	30.5	25.8	25.4
Operating Businesses	4.4	3.8	4.7	21.7	25.0	30.2	30.5
	100.0	100.0	100.0	100.0	100.0	100.0	100.0
* 2003 percentages are estimates based on assets as of Sept. 30, 2003.

To arrive at these percentages, I added up the dollar values of Berkshire's cash, bond, and equity holdings, as well as the total assets of the companies that Berkshire owns outright: companies such as See's Candies, Shaw Industries, NetJets, and many more. (I also included MidAmerican Energy, which Berkshire effectively controls, even though it doesn't consolidate it for regulatory reasons.) In 1997, 72.9% of these assets, or about $36 billion, rested in publicly traded equities. By 2003, I estimate the percentage had shrunk to 25.4%.

Besides his aversion to stock valuations, what accounts for the dropping equity percentage? First of all, Berkshire has sold its large stakes in  Walt Disney (DIS),  Freddie Mac (FRE), and Travelers over the past six years. (Travelers merged with  Citigroup (C) in 1998.) Secondly, two of Berkshire's largest holdings-- Coca-Cola (KO) and  Gillette --have declined in value since 1997. Finally, the rest of Berkshire has grown rapidly, leaving the equity portfolio behind. Buffett has been on an acquisition tear the past five years, negotiating the purchases of entire businesses rather than buying minority equity stakes through the stock market. The two largest purchases in 2003 were McLane, the former distribution unit of  Wal-Mart (WMT), and Clayton Homes, the mobile-home maker.

If I had included assets from Berkshire Hathaway Finance, the tilt away from equities would be even more dramatic. BH Finance is where Buffett trades bonds using proprietary trading techniques--techniques Buffett won't disclose. The division's assets--mainly government bonds, mortgage-backed bonds, and assorted loans--rose to $27 billion in September 2003 from just $1 billion in 1997. BH Finance will expand and contract as Buffett sees opportunities in the debt markets. Assets here peaked at $42 billion in the fall of 2001. This decline, combined with the fall in bond assets shown in the table above, indicates Buffett has become less bullish on bonds. When the annual report is released, it'll be interesting to see if assets in BH Finance have contracted even further.  

Berkshire Under the X-Ray
To analyze the composition of Berkshire's equity portfolio, I put the holdings into Morningstar.com's Portfolio X-Ray tool. Here's a bird's-eye summary.

About 90% of Berkshire's equity portfolio resides in its top 10 names. That compares with less than 30% for  Fidelity Magellan (FMAGX)--a fairly typical level of concentration for a mutual fund--and 80% for Buffett's friends over at  Sequoia Fund  (SEQUX). Berkshire's top holdings--Coca-Cola,  American Express (AXP), Gillette, and  Wells Fargo (WFC)--dominate the portfolio. (These are all Buffett stocks, by the way, not Simpson picks.)

Buffett has never been a fan of spreading his bets. Diversification may reduce volatility, but it doesn't necessarily reduce risk (the two concepts are often confused). Buffett argues that the best way to reduce risk is to focus on companies you know extremely well and companies that boast strong competitive positions.

And diversification across industries? Forget about it. The table below shows that Berkshire's portfolio has 80% of its equity assets in just two sectors: consumer goods and financial services. 

Berkshire's Equity Holdings by Sector
	Portfolio ( % )	S&P 500 ( % )
Information	6.09	23.73
Software	0.00	4.67
Hardware	0.00	11.46
Media	6.09	4.15
Telecommunications	0.00	3.45
Service	53.24	46.48
Health Care	1.83	13.17
Consumer Services	4.05	8.73
Business Services	6.95	3.87
Financial Services	40.41	20.71
Manufacturing	40.66	29.79
Consumer Goods	39.82	9.42
Industrial Materials	0.74	11.76
Energy	0.10	5.94
Utilities	0.00	2.67

Although Buffett often gets pigeonholed as a value investor, only 3% of Berkshire's portfolio resides in value stocks as Morningstar defines them:

Berkshire's Equity Holdings by Style
	Value ( % )	Core ( % )	Growth ( % )
Large Cap	3	53	30
Mid-Cap	0	8	5
Small Cap	0	0	0

Buffett wouldn't care where his stocks fell on the value/growth spectrum. In the Buffett worldview (and in the Morningstar Rating for stocks, which is heavily influenced by Buffett) the distinction between value and growth stocks doesn't enter the picture. Any company is a potential value, whether it's growing rapidly or not.

Besides not caring about the distinction between growth and value, Buffett also lets his winners ride: He doesn't sell stocks when they get expensive. Rather, he sells them when he no longer feels comfortable with the underlying businesses. For each of its top eight holdings, Berkshire's cost basis is far below the current market value, so selling any of them would trigger large capital-gains taxes. As long as the underlying businesses are healthy, Buffett is unlikely to sell and give up this "interest-free loan" from the government.

The Complete Holdings
Finally, here's a complete list of Berkshire's holdings, ranked from largest position to smallest. We also list each company's economic moat, which our stock analysts assign based on their opinion of a firm's competitive advantages, as well as the stock's current Morningstar Rating, which is based on the difference between the stock's current price and our fair value estimate. For more information, Premium Members can click the company name to see Morningstar's Analyst Report on the firm. Or click the stock ticker to see the company's data report.  

Further down the list are some intriguing stocks not on many people's radar screens--names such as Dover, an outstanding industrial firm that pursues a Buffettlike acquisition strategy of buying solid companies and leaving them alone, and Iron Mountain, a company that stores paper records for other firms. Most of these smaller holdings are Simpson picks.

1.  Coca-Cola  (KO): Wide Moat, 3 Stars
2.  American Express  (AXP): Wide Moat, 2 Stars
3.  Gillette  : Wide Moat, 3 Stars
4.  Wells Fargo  (WFC): Wide Moat, 3 Stars
5.  Wesco Financial  : Narrow Moat, 3 Stars
6.  Moody's  (MCO): Wide Moat, 2 Stars
7.  Washington Post (WPO): Wide Moat, 4 Stars
8.  H&R Block (HRB): Wide Moat, 3 Stars
9. HCA-The Healthcare Company : Not Rated
10. M&T Bank (MTB): Not Rated
11. Nike (NKE): Not Rated
12. SunTrust Banks : Not Rated
13. Shaw Communications  (SJR): Not Rated
14. American Standard Companies  : Not Rated
15. Cadbury Schweppes (CSG): Not Rated
16.  First Data  : Wide Moat, 4 Stars
17.  Gap  (GPS): Narrow Moat, Under Review
18.  Gannett  (GCI): Narrow Moat, 3 Stars
19.  Iron Mountain  (IRM): Wide Moat, 5 Stars
20.  Costco Wholesale (COST): Narrow Moat, 3 Stars
21. USG  : Not Rated
22. Torchmark  (TMK): Not Rated
23.  Outback Steakhouse  : No Moat, 3 Stars
24.  Dover  (DOV): Narrow Moat, 3 Stars
25. Mueller Industries  (MLI): Not Rated
26. Comdisco Holding Company : Not Rated
27.  Automatic Data Processing (ADP): Wide Moat, 3 Stars
28.  Sealed Air  (SEE): Narrow Moat, 3 Stars
29. Petrochina Company : Not Rated
30. Zenith National Insurance  : Not Rated