The 27 Stocks in the Buffett Portfolio

Periodically, we take a look at the stock holdings of  Berkshire Hathaway (BRK.B). Berkshire, of course, is the holding company run by Warren Buffett, one of the all-time great investors. Each quarter, the company files a 13F form with the SEC, which details the equity holdings of Berkshire and its subsidiaries. 

Based on the company's latest 13F, which disclosed holdings as of March 31, Berkshire continues to whittle down the size of its equity portfolio. The company disclosed positions in 27 stocks, down from 30 the previous quarter, which in turn was down from 32 the first time we did this piece over a year ago. Berkshire has had trouble finding bargains the past few years, whether in equities, bonds, or acquisitions. The latest stocks dropped were  Dover (DOV), which Berkshire had already been selling in the previous quarter, and  Automatic Data Processing (ADP). (Also missing was  Cadbury Schweppes (CSG), which Berkshire doesn't have to disclose because it owns the local shares in London, not the ADRs that trade in the U.S.)

We know of at least one addition Berkshire made after the 13F was filed. The company exercised warrants it held to purchase a 16% stake in  White Mountains (WTM), a great little insurance company known for its underwriting discipline and ability to turn around struggling insurance firms.

Below, I list each stock found in the latest 13F, 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.

Berkshire's Portfolio
How does the portfolio look in aggregate? If it were a mutual fund, Berkshire's equity portfolio would rank ninth in size 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). If you threw in cash, Berkshire's portfolio would rank third. But whereas most funds would spread those assets among a hundred or more holdings, Berkshire concentrates them in just a few dozen stocks.

Most of these 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 is one heck of an investor in his own right. 

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. 

Berkshire's Asset Allocation ( % )
Investment Breakdown	1998	1999	2000	2001	2002	2003	Q1 04
Cash	17.5	5.0	5.5	5.7	9.4	24.7	26.7
Bonds	27.4	39.2	33.8	38.8	34.6	20.7	19.2
Publicly Traded Equities	51.3	51.2	39.0	30.5	25.8	27.9	27.7
Operating Businesses	3.8	4.7	21.7	25.0	30.2	26.7	26.4
	100.0	100.0	100.0	100.0	100.0	100.0	100.0

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 1998, 51.3% of these assets rested in publicly traded equities. By the end of the first quarter of 2004, the percentage was 27.7%.

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 is now a part of  St. Paul Travelers Companies (STA).) Secondly, two of Berkshire's largest holdings-- Coca-Cola (KO) and  Gillette --have declined in value since 1998. 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 $28 billion in March 2004 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.  

Warren Buffett: Growth Investor
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. Volatility can actually help reduce risk because it allows more opportunities for a savvy investor like Buffett to load up on an asset when prices are attractive. 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. If their earnings or share price happen to bounce around a lot in the short term, who cares?

Although Buffett often gets pigeonholed as a value investor, only 3% of Berkshire's portfolio resides in value stocks as Morningstar defines them. And because some of Berkshire largest equity holdings--Coca Cola and Gillette--have moved into the growth column of Morningstar's Style Box, the bulk of Berkshire's equity portfolio resides in, of all thing, growth stocks. 

Berkshire's Equity Holdings by Style
	Value ( % )	Core ( % )	Growth ( % )
Large Cap	3	35	52
Mid-Cap	0	9	1
Small Cap	0	0	0

Buffett wouldn't care where his stocks fell on the value/growth spectrum. In the Buffett world-view (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.

And diversification across industries? Forget about it. The table below shows that Berkshire's portfolio has almost 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	6.00	22.78
Software	0.00	4.25
Hardware	0.00	11.12
Media	6.10	3.88
Telecommunications	0.00	3.53
Service	49.80	47.27
Health Care	1.78	13.07
Consumer Services	3.80	9.16
Business Services	6.02	3.74
Financial Services	38.20	21.30
Manufacturing	44.20	29.79
Consumer Goods	40.58	9.57
Industrial Materials	0.57	11.53
Energy	3.05	6.10
Utilities	0.00	2.76

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 Iron Mountain, a company that stores paper records for other firms. Most of these smaller holdings are Simpson picks. (Moat and star-rating data are as of July 16.)

1.  Coca-Cola  (KO): Wide Moat, 3 Stars
2.  American Express  (AXP): Wide Moat, 3 Stars
3.  Gillette  : Wide Moat, 2 Stars
4.  Wells Fargo  (WFC): Wide Moat, 3 Stars
5.  Wesco Financial  : Narrow Moat, 4 Stars
6.  Moody's  (MCO): Wide Moat, 3 Stars
7.  Washington Post (WPO): Wide Moat, 4 Stars
8.  Petrochina Company : Narrow Moat, 1 Star
9.  H&R Block (HRB): Wide Moat, 3 Stars
10.  HCA-The Healthcare Company : Narrow Moat, 2 Stars
11.  M&T Bank (MTB): Narrow Moat, 3 Stars
12.  Nike (NKE): Narrow Moat, 3 Stars
13.  SunTrust Banks : Narrow Moat, 4 Stars
14. Shaw Communications  : Not Rated
15. American Standard Companies  : Not Rated
16.  First Data  : Wide Moat, 3 Stars
17.  Gap  (GPS): Narrow Moat, 3 Stars
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): Narrow Moat, 3 Star
23.  Outback Steakhouse  : No Moat, 3 Stars
24. Mueller Industries  (MLI): Not Rated
25. Comdisco Holding Company : Not Rated
26.  Sealed Air  (SEE): Narrow Moat, 3 Stars
27. Zenith National Insurance  : Not Rated