No. of Recommendations: 9
I am guessing that this leverage has been responsible for most of Buffett's superior returns, not the fact that he picked great stocks. Would you dispute this claim?"
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I think the success of the Apple pick by itself disputes this claim
Sure we could debate where the $30b of so came from to by the position but that doesn't take away from the guts required to go in that deep.
Someone else may point out a way of teasing out how much of Buffett's success comes from the stock picks and how much comes from the safe leverage which his conglomerate has provided - I can't think of a way of doing it right now.
But the success of one stock pick does not really clinch the argument. Looking at the common equity positions, apart from Apple, the big stakes have not really done much lately: I'm thinking of WFC/BAC, Amex, Coca-Cola and KraftHeinz, all big stakes that have done nothing much for 20 years. Moody's has done well, but unfortunately Buffett sold most of it before its big run up after 2018. I would venture to guess that he has underperformed the index with the 'Everything but Apple' part of his portfolio, and that is not counting the big strikeout with the airlines.
And what about the big Kahuna, Apple itself? Buffett started buying in Q1 of 2016, the first 40 million of what is now about 930m shares, with the big purchases coming in Q4 of 2016, Q1 and Q4 of 2017 and Q1 of 2018. Just for the sake of the argument and to simplify things, let's look at how Apple has done since midway thru 2016, compared to alternative moaty supercap stocks like Microsoft, Amazon, Google and Facebook that he might have bought, or even compared to the S&P.
Apple 377%
Microsoft 514%
Amazon 264%
Google 254%
Facebook 151%
S&P 104%
Ok, great, so Apple has worked out quite well, but Microsoft would have done considerably better, and Google and Amazon would have done almost as well. We will see how Apple holds up going forward; I think it is the most vulnerable of all these, but time will tell.
And then there are the big acquisitions: BNSF, Precision CastParts, and Pilot and MidAmerican Energy, now BH Energy. BNSF has done well but not brilliantly. PCP has been terrible, with Berkshire having already written down $10b of the $32b price tag, bought in 2016, the same year as Apple. We will see how much of Pilot has to be written down, but I am not optimistic. BHE will probably need a big write down as well, as litigation costs and difficult regulators have cut into what I used to think was an exception to the general rule of bad performance.
All told, results have been mediocre in the last 25 years, I think, since the GenRe acquisition. Berkshire has still done remarkably well, roughly keeping up with the S&P, probably because it has avoided really big catastrophes, and because the Apple success has pulled up results a lot, and because of LEVERAGE.
So I can't prove it, but I am sticking with my hypothesis that ok results with good leverage have been the key to success, at least for the last 25 years.
Regards, DTB
