Berkshire Hathaway Stock Portfolio: At Risk of Resembling an Index Fund?

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With so much attention being paid to Buffett’s recent acquisition of BNI (myself included), little has been written about his other recent transactions. In the third quarter of 2009, Buffett added two new positions from the Dow Jones Industrial Average, or DJIA, to Berkshire Hathaway’s (BRK.A) portfolio: Exxon Mobil (XOM) and Travelers (TRV). In addition, he also doubled Berkshire’s stake in Walmart (WMT). Currently, Buffett has forty-three stocks in his portfolio, worth a total of approximately fifty six-billion dollars. It seems that as Buffett’s portfolio grows, he is forced to buy only the big blue chip stocks, thereby making it harder for him to beat the market.

Right now, Buffett owns eleven out of the thirty Dow Jones stocks: KO, JNJ,PG, GE, KFT, BAC, WMT, AXP, HD, TRV and XOM. That means he owns shares in slightly more than one out of every three stocks in the Dow. Buffett, like his mentor Benjamin Graham, never procures technology stocks. Therefore, the five technology stocks that are part of the Dow (MSFT, HPQ,CSCO, IBM and INTC) should be removed from our current equation. Removing them, we are left with twenty-five Dow stocks with which Buffett might possibly own. Out of those twenty-five, he owns eleven of them. That is 44% of the Dow. From this equation, I have deduced that Berkshire Hathaway is starting to resemble an index fund and will not be able to beat the market as Berkshire’s assets grow.

With Buffett’s recent bid for BNI, his fifty six- billion dollar stock portfolio will soon be worth fifty-billion dollars. This is due to the fact that BNI will be held privately and will no longer be included in Buffett’s stock portfolio. Out of that fifty-billion dollars, approximately thirty-billion dollars, or 60% of his entire stock portfolio, are Dow components. This figure does not even include the three-billion dollar warrants and preferred shares from GE that he owns.

There are two main areas of contention with my argument. First, Buffett has been reducing his stake in HD and BAC. This means he is not planning and holding just blue chip stocks or exclusively buying Dow companies. Additionally, Buffett claims he was not involved in the original acquisition of BAC stock. Second, the weighting is obviously very different in the Berkshire portfolio than in the DJIA. For example, Coke is currently only weighted 4.1% in the DJIA, but it is weighted 19% in Berkshire’s portfolio.

However, I think my point is still valid. Buffett is one of the best investors of all time and for the past forty years, he has produced phenomenal returns. However, as the amount of money he invests increases, it gets harder and harder for him to beat index funds. Buffett famously said that if he had a million dollars, he could return 50% a year; however with over fifty-billion dollars, this is virtually impossible. Presently, Buffett does not invest less than one hundred-million dollars in any company and is therefore severely limited in his choices. He informed Charlie Rose during an interview last Tuesday, November 17th that he has eight to ten-billion dollars every year to invest and that there are a very limited numbers of companies he can invest in.

Even the best money managers reach a certain amount of assets where they can no longer beat the market. This will eventually become the case withWarren Buffett. It could happen now when Buffett is managing fifty-billion dollars, or in the future when he is managing several hundred-billion dollars, but it will eventually occur. As his stock portfolio keeps growing so rapidly in size, it looks like it will happen sooner rather than later.

Full Disclosure: The author has positions in KO, GE, PG, WMT, and AXP.

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