Wells Fargo has averaged about 17 percent of Berkshire’s U.S. equity investments this year, according to data compiled by Bloomberg. That compares with about 1.4 percent in the Standard & Poor’s 500 Index. The gain in the bank’s shares has buoyed the portfolio as other investments, such as a holding in International Business Machines Corp. (IBM), have trailed peers.
Buffett’s “point is that if you are going to be in financials you need to be selective,” said Matt McCormick, who helps oversee $6.5 billion as a fund manager at Bahl & Gaynor Inc. in Cincinnati. “You really have to do your homework, you really have to be selective, and when in doubt go for quality.”
Buffett, 82, oversees most of Omaha, Nebraska-based Berkshire’s equity portfolio, valued at about $90 billion, including the largest stakes in IBM and Coca-Cola Co. He bets he can beat the market by focusing on stocks he knows well, buying at prices that include a margin of safety should the investments falter and holding stakes for many years.
“That’s a proven way to maintain a competitive advantage in this crazy business, where people judge their performance on a daily basis and do stupid things as a result,” said Jeff Matthews, a Berkshire shareholder and author of “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett.”
Berkshire’s portfolio returned 13.9 percent this year including reinvested dividends through Aug. 28, based on an analysis of securities filings that list holdings on the last date of each quarter. That compares with 13.7 percent for the S&P 500. The firm’s performance beat the benchmark last year by 4.4 percentage points, matched in 2010 and fell short by about 6.9 percentage points in 2009, data compiled by Bloomberg show.
Buffett, the second-richest person in the U.S., said at the 2007 meeting of Berkshire shareholders that he thinks his portfolio can beat the S&P 500 by “a couple percentage points” over most long-term periods and that he would be “amazed if it did better than that.”
The billionaire has highlighted the challenge of finding outsized returns as his company gets larger. Stock picks and acquisitions helped build Berkshire into a firm valued at more than $200 billion with dozens of operating subsidiaries selling products from insurance to underwear.
“Reasonable return is good enough,” Buffett said in a 2009 interview with Charlie Rose on PBS. “Fifty years ago I was looking for spectacular returns, but I can’t get them” as the company generates larger sums to invest, he said.
Berkshire’s performance against the S&P 500 has slipped even according to Buffett’s favorite metric, book value per share. The measure of assets minus liabilities, which Buffett says most closely indicates a firm’s value, trailed the index four times in the 10 years through 2011 after lagging behind just four times in the previous 37.
Financial-services stocks accounted for more than half of Berkshire’s total return this year through Aug. 28. A stake in American Express Co. (AXP), which has climbed 22 percent since Dec. 31, added to the gains on San Francisco-based Wells Fargo.
Buffett didn’t respond to a request for comment sent to an assistant.
Buffett, who has increased Berkshire’s holdings in the home lender for seven of the last eight quarters, praised the company’s mortgage operation and push into investment banking in an interview with Betty Liu on Bloomberg Television last month.
While Buffett concentrates his portfolio in a few dozen stocks and had no common equity holdings as of June 30 in some S&P groups, such as telecommunication services and materials, he has said he avoids taking too much risk in a single industry. Berkshire hasn’t bought stock in JPMorgan Chase & Co. (JPM), even as Buffett took a personal stake in the company and has praised Chief Executive Officer Jamie Dimon.
“There’s a limit to how much I would want in banks compared to the whole portfolio” at Berkshire, he told Liu in explaining why his firm holds Wells Fargo among the largest U.S. lenders. “I like loading up on the one I like best.”
Information-technology stocks were the biggest contributor to the S&P 500’s return this year, data compiled by Bloomberg show. The gain was led by a surge in Apple Inc. (AAPL), a stock Berkshire didn’t own as of June 30. Buffett’s investments in the group were mainly in IBM, which returned 7.3 percent this year through Aug. 28 compared with the 21 percent gain in the group.
Berkshire began accumulating its IBM stake last year in a bet that the world’s largest computer-services provider will grow as it develops its business globally. The Armonk, New York-based company has benefitted shareholders through buybacks and built a reputation for helping companies around the world develop IT departments, he has said.
Weakening demand in China may pressure IBM’s revenue, Mark Moskowitz, an analyst with JPMorgan, said in an Aug. 24 note to clients. Still, the company’s “customer base is full of steady spenders,” he said.
Berkshire’s portfolio consists of a larger percentage of consumer-staples stocks than the S&P 500 as Buffett bet that global brands like Coca-Cola’s namesake beverage and Procter & Gamble Co. (PG)’s Gillette razors will continue to appeal to shoppers. That strategy helped in 2010, and has hurt performance in 2011 and so far this year.
Buffett pared holdings of consumer stocks including P&G and Kraft Foods Inc. in the second quarter. The company also sold part of its stake in Tylenol-maker Johnson & Johnson, which is grouped with health-care stocks in the S&P 500.
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