Many commentators shrugged and some even tweeted out things like “yawn” in response to Berkshire adding the Dow component to its portfolio. That’s because it joins a bunch of other Dow Industrial companies already in the Berkshire portfolio.
At the end of the third quarter, Berkshire had $104.9 billion invested in equities. Its top 4 holdings reads like a who’s who of the Dow Industrials: American Express (AXP), Coca-Cola (KO), IBM (IBM) and Wells Fargo (WFC). Just those four positions, alone, account for $58.4 billion of the portfolio.
Berkshire disclosed its Exxon position was 40 million shares for $3.4 billion. It’s another sizable large cap position.
Berkshire Is Too Big
Berkshire Hathaway has a market cap of $282 billion. It owns over 80 companies and invests in dozens more. But when you have a portfolio that is over $100 billion, you can’t just buy any small cap stock that stokes your fancy.
The larger you are, the more likely you are to invest in mid-to-large cap companies. Investing in dozens of small cap companies with $500 million market caps won’t make a dent a portfolio that is worth $100 billion. For example, even if that $500 million doubles in value and becomes a $1 billion company, that’s still just a drop in the bucket for a $100 billion portfolio.
That’s why Berkshire is now saddled with numerous well known Dow component companies and owns no shares in companies with market caps under $1 billion.
Small is King
If you want growth, you buy small cap companies. Those are companies whose market cap is under $1.5 billion. Earlier in his career, before Berkshire grew into a billion dollar behemoth, Buffett used to buy obscure small cap companies and ride them higher to great returns.
If you really want to invest like Buffett, invest like the young Buffett. Forget all of Berkshire’s recent purchases. Look for small cap companies that Buffett would have liked to own if he could he still buy small caps.
I did a screen for small cap stocks with Zacks Rank #1 (Strong Buy) and (Buy) stocks that also were value stocks, either through P/E, P/B or P/S, or a combination of those.
And then I asked: Would a young Buffett have bought this stock?
3 Stocks That a Young Buffett Would Have Loved
1. Haverty Furniture
2. Salem Communications
3. The Andersons