Investintghe ghost train by the finance ghost
he weekend’s activities on Twitter were dominated by hedge fund managers and top investors getting excited about what has been called Woodstock for capitalists: the Berkshire Hathaway AGM.
With Charlie Munger at 99 years old and Warren Buffett at 92, nobody is sure how many more of these opportunities might present themselves. In a post-Covid world where people are allowed to be human beings again, an extraordinary number of people made the annual pilgrimage to Omaha. For many it was the highlight of their year.
In stark contrast to Omaha, I’m writing this from an Airbnb in Knysna where I’ve made my annual pilgrimage to watch the Simola Hillclimb, my favourite local motorsport event. I might not be sitting in a packed venue listening to the Oracle of Omaha, but I have money invested in Berkshire Hathaway and my portfolio gets to enjoy the international exposure even if I can’t be there in person.
If you’ve never been to the Berkshire Hathaway website, do yourself a favour and check it out. You’ll be shocked at how simple it is. It looks as if it was put together at the dawn of the internet (and it quite possibly was), with absolutely no effort made at corporate branding. Ironically, that is the brand for Berkshire Hathaway. The results do the talking.
Another element of the website that is worth noting is the effort made to showcase the underlying companies in the portfolio. Whether in the form of a link on the website or a letter from Buffett making a
Trecommendation to get an insurance quote, the subsidiary companies enjoy substantial support from Berkshire Hathaway. At the annual event, they are there showing off their products and helping shareholders in Berkshire get closer to the underlying businesses.
The Berkshire Hathaway A shares have famously never had a stock split. If you want to own a full share, you’ll need more than $490,000 to achieve that! Thankfully, fractional ownership of shares means anyone can be a “shareholder” in the company. If you can afford it, a B share (about $324) is also a much cheaper alternative that gets you a full stake in the company.
Go big
There are a million different angles to the Berkshire story, ranging from the famous candidness of the protagonists to the way the insurance float has been used to turbocharge growth in the company. The concentration of investments is frequently spoken of as well, with Berkshire having demonstrated the power of making a few big bets rather than many small ones.
I would caution that big bets look fantastic when they work and become very painful when they don’t. I’ve never felt comfortable with a highly concentrated portfolio due to the sheer randomness of the modern world and the potential for industry disruption.
The angle I find most interesting is a spin-off of the concentration point. As at March 2023, 77% of the equity investment portfolio was concentrated in just five companies: American Express, Apple, Bank of America, The Coca-Cola Co and
Chevron. This doesn’t tell the full story, as the exposure to Apple is much larger than you may think. A whopping 46% of the equity portfolio is attributable to Apple.
If you asked me to pick only two stocks for the rest of my life, it would be Apple and Microsoft. I sometimes wish I would just follow that route and ignore the noise, as both companies have built exceptional market positions in a world where themes such as smartphones, platforms and cloud computing have created generational wealth opportunities.
As artificial intelligence becomes increasingly relevant to the next phase of growth in the tech sector, Microsoft in particular has made some smart moves.
But Apple is the focus here, with Berkshire holding nearly 6% in the company. There’s little reason to change that, as Apple continues to perform well despite challenging macroeconomic conditions. In the quarter ended March, revenue fell by 3% year on year but earnings per share were unchanged. The installed base of devices reached a record high (helped by a record March quarter for iPhone), which is the core underpin of the services business.
Speaking of services, this segment now contributes 22% of revenue and 35% of gross profit, as it has incredible unit economics with high margins. Though revenue was down year on year in Mac, iPad and wearables, the Apple cash-generating machine keeps producing, and the extensive share buybacks that played a major role in the Berkshire investment reaching its current size are set to continue. I happily hold shares in both Apple and Berkshire.