The 33 Stocks in the Buffett Portfolio

Periodically, we review  Berkshire Hathaway's   stock holdings. Berkshire is the conglomerate run by Warren Buffett, one of the all-time great investors. Each quarter, Berkshire files form 13-F with the SEC, which discloses its consolidated equity investments.

Berkshire's latest 13-F disclosed 32 stock positions as of June 30, and we added one foreign investment we knew of, for a total of 33. Note: we excluded Gillette, which has since merged with  Procter & Gamble , and added  Anheuser-Busch , because Buffett has admitted accumulating a position even though Berkshire hasn't formally disclosed this to the SEC yet. We also omitted Ameriprise Financial , because we don't know whether Buffett retained his holding after it was spun off from  American Express . Berkshire now owns more stocks than at the end of 2004 and 2003, when it owned 29 and 30 stocks, respectively. However, Berkshire continues to struggle to find bargains--whether in equities, bonds, or acquisitions--as evidenced by a cash hoard that is approaching $50 billion. Although Berkshire has made several small acquisitions this year, cash seems to arrive in Omaha ever faster.

That said, we have seen some action in stocks from Berkshire lately. The firm did not disclose positions in  H&R Block  or  Torchmark  in its latest 13-F, leading us to suspect that these have been, or will be, sold. Meanwhile, Berkshire disclosed new investments in  Home Depot ,  Lexmark International , and  Tyco International . We understand that Berkshire also has a stake in European home improvement retailer Kingfisher   LSE:KGF, although Berkshire doesn't have to disclose this because it owns the local shares in London, not the U.S. ADRs.

Below, we 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 if you're already a member, sign in and try again.) This will allow you to save and monitor these holdings within our Portfolio Manager.

Prospective investors take note: As of Oct. 20, 2005, 11 of Berkshire's stocks boasted 5-star ratings; we think these stocks are excellent candidates for further research: Anheuser Busch,  Gannett ,  Gap ,  Coca-Cola , Lexmark International,  Outback Steakhouse ,  Sealed Air ,  Pier 1 Imports ,  Washington Post ,  Wells Fargo  and  Wesco Financial . What's more, we think that investors currently have a rare opportunity to buy a stock at the same time as Buffett--and at a lower price to boot! When Anheuser-Busch announced that Berkshire was buying the stock, the price was around $45 and had been falling. Since it takes time to acquire large quantities of stock, we can infer that Berkshire's average cost to that point is probably greater than $45. Intriguingly, Anheuser-Busch's price now is much lower.

Berkshire's Portfolio
How does the portfolio look in aggregate? If it were a mutual fund, Berkshire's equity portfolio would rank 16th in size among domestic-equity funds, right on par with  Fidelity Contrafund  and  Dodge & Cox Stock , and about one third the size of  Vanguard 500 Index  . If you threw in cash, Berkshire's portfolio would rank third, behind  American Funds Growth Fund of America  and  Vanguard 500 Index . But whereas most funds would spread those assets among a hundred or more holdings, Berkshire concentrates them in just a few dozen stocks--more than 90% of its equity portfolio is invested in the 10 largest stocks.

Many of these stocks aren't Buffett's picks, since Lou Simpson, who manages the equity portfolio at auto-insurance subsidiary GEICO also invests the firm's capital. Buffett and Simpson share similar investment styles--buying high-return businesses, focusing on best ideas--and they operate independently. Although we're occasionally asked, we rarely devote time to guessing which stocks are Buffett's picks and which are Simpson's. We think this is irrelevant--as Buffett pointed out in his 2004 shareholder letter, Simpson is one heck of an investor, having outperformed the S&P 500  by 6.8% over the past 24 years. We'd gratefully learn from either.

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

More than 90% of Berkshire's equity portfolio resides in its top 10 names. That compares with about 26% for  Fidelity Magellan --a fairly typical level of concentration for a mutual fund--and 80% for Buffett's friends over at  Sequoia Fund  . Berkshire's top holdings--Coca-Cola, American Express, Procter and Gamble, and Wells Fargo--dominate the portfolio.

Buffett has always favored focusing his investments, arguing that diversification merely protects against ignorance. And 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 assets 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 prices happen to bounce around a lot in the short term, who cares?

Although Buffett often gets pigeonholed as a value investor, only 11% of Berkshire's portfolio resides in value stocks as Morningstar defines them. Berkshire's largest equity holdings--American Express, Coca Cola, and Procter & Gamble--currently reside in the core column of the Morningstar Style Box. Among Berkshire's growth stocks are  Comcast ,  Moody's , and  Iron Mountain . 

Berkshire's Equity Holdings by Style
	Value ( % )	Core ( % )	Growth ( % )
Large Cap	11	68	9
Mid-Cap	0	12	0
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. However, we think Buffett's value orientation is easily evidenced by estimating the aggregate Price/Fair Value ratio for Berkshire's portfolio, which we peg at around 73%. In other words, Berkshire's average stock trades for just 73% of Morningstar's valuation. Others may disagree, so we'll cheerfully point out this recent academic paper, which contends that Buffett is actually a large-cap growth investor (fair warning: the paper is technical).

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, even if he regrets it later, as he seems to in regard to several stocks from the 1999-2000 market top. 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.

Asset Allocation, Berkshire Style
Berkshire's equity portfolio is only marginally larger than in 1998, 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. However, we note that equities have increased markedly this year, likely indicating a sizable purchase or two--possibly in addition to Anheuser-Busch.

Berkshire's Asset Allocation
Asset	1999	2000	2001	2002	2003	2004	2Q 2005
Cash	5.0%	5.4%	5.7%	9.4%	24.7%	29.5%	30.4%
Bonds	39.2%	33.3%	38.7%	34.6%	20.7%	16.8%	16.0%
Public Equities	51.2%	38.4%	30.6%	25.8%	27.9%	27.8	29.0%
Businesses	4.7%	22.9%	25.1%	30.2%	26.7%	25.9%	24.7%
Morningstar data

To estimate these percentages, we 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: these include General Re, See's Candies, Forest River, The Pampered Chef, Dairy Queen and many more. In 1998, 51.3% of these assets rested in publicly traded equities. By the middle of 2005, this figure declined to 29%.

Besides his aversion to rich stock valuations, what accounts for the dropping equity percentage? Berkshire has sold its large stakes in  Walt Disney ,  Freddie Mac , and Travelers over the past seven years. (Travelers is now a part of  St. Paul Travelers Companies .) More importantly, 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 food distributor McLane and Clayton Homes, the mobile-home maker. Although the acquisition pace slowed in 2004, Berkshire has been active again this year, most notably by acquiring liability insurer Medical Protective from  General Electric  for $825 million.

If we had included assets from Berkshire Hathaway Finance, the longer-term tilt away from equities would be more dramatic. BH Finance is Buffett's vehicle for proprietary trading, mostly in the fixed-income markets--although Buffett mostly won't disclose his strategies. (He did explain one strategy at the annual meeting--buying high-yield bonds at a high yield to maturity, which is equivalent to investing at a 60%-80% discount to fair value). The division's assets--mainly government bonds, mortgage-backed bonds, and assorted loans--rose to $28 billion in June 2005 from just $1 billion in 1997, although they are lower than the $30 billion reported at year-end. 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, and have since fallen as Buffett sees fewer bond arbitrage opportunities.

The Complete Holdings
Here's a complete list of Berkshire's holdings, ranked from largest position to smallest, save for Anheuser-Busch and Kingfisher, for which we do not yet know the weightings. 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.
(The moat and rating data are current as of Oct. 10, 2005.)

Also, during Morningstar.com's Premium Stock Research Week, we invite all visitors and Morningstar.com free members to view these and the more than 1,600 other stock Analyst Reports free of charge. Click here for more information.

1.  Coca-Cola  : Wide Moat, 5 Stars
2.  American Express : Wide Moat, 3 Stars
3.  Procter & Gamble  : Wide Moat, 3 Stars
4.  Wells Fargo  : Wide Moat, 5 Stars
5.  Moody's  : Wide Moat, 3 Stars
6.  Wesco Financial  : Narrow Moat, 5 Stars
7.  Washington Post : Wide Moat, 5 Stars
8.  M&T Bank : Narrow Moat, 3 Stars
9.     Shaw Communications : Not Rated
10.  American Standard : Narrow Moat, 3 Stars
11.  First Data : Wide Moat, 4 Stars
12.  Gap : Narrow Moat, 5 Stars
13.  Comcast  : Wide Moat, 4 Stars
14.     USG Corporation : Not Rated
15.  Gannett : Narrow Moat, 5 Stars
16.  Costco  : Narrow Moat, 3 Stars
17.  SunTrust Bank : Narrow Moat, 3 Stars
18.  Nike : Narrow Moat, 3 Stars
19.  Iron Mountain  : Wide Moat, 3 Stars
20.  Tyco International : Narrow Moat, 4 Stars
21.  Pier 1 Imports  : No Moat, 5 Stars
22.  Outback Steakhouse : No Moat, 5 Stars
23.  ServiceMaster : Narrow Moat, 2 Stars
24.  Lexmark International  : Narrow Moat, 5 Stars
25.  Sealed Air  : Narrow Moat, 5 Stars
26.  PetroChina  : Narrow Moat, 1 Star
27.  Home Depot : Wide Moat, 4 Stars
28.     Mueller Industries : Not Rated
29.     Comdisco Holding : Not Rated
30.  Lowe's Companies : Wide Moat, 3 Stars
31.  Dean Foods : Narrow Moat, 3 Stars
32.  Anheuser-Busch : Wide Moat, 5 Stars
33.     Kingfisher : Not Rated

Thanks to Kate Matrosova for analyzing Berkshire's financials.