From time to time, legendary investor Warren Buffett will discuss his biggest investing mistakes. Often these comments are made within the very public letters to Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) shareholders.
But rarely does Buffett discuss the best stocks he’s owned. I guess that’s his Midwest upbringing.
Nevertheless, you don’t become the seventh wealthiest person in the world without a few success stories. Certainly, Apple (NASDAQ:AAPL) is a recent example of his stock-picking acumen. And there are plenty of others within Berkshire’s $279 billion equity portfolio.
However, for this article, I will go back through some of his shareholder letters to find examples where Buffett talks up some of his holdings. I think that’s an interesting way to put some of these stocks in perspective.
“What did Warren think about XYZ stock?” is a common question in the markets. Anything that can help investors get better at identifying quality companies is a win in my books.
- Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B)
- SPDR S&P 500 ETF Trust (NYSEARCA:SPY)
- Bank of America (NYSE:BAC)
- American Express (NYSE:AXP)
- BYD (OTCMKTS:BYDDF)
- Apple (NASDAQ:AAPL)
Without further ado, let’s take a look at some of Warren Buffett’s best stocks over the past decade.
Best Stocks Warren Buffett Bought: Berkshire Hathaway (BRK.A, BRK.B)
While it won’t show up on CNBC’s Portfolio Tracker, Berkshire Hathaway stock is becoming a very attractive investment for Buffett. Once opposed to share repurchases, the company’s begun to loosen the purse strings in recent years when it comes to BRK.
In the 2019 letter, Buffett discussed when the company will repurchase Berkshire shares. Specifically, when they are selling for less than they are worth and won’t leave the company short of cash.
In 2019, Berkshire repurchased approximately $5 billion of its stock, buying back 1% of the company. Because it has two classes of shares, it’s hard to calculate exactly how much it repurchased of each class without going back through all four quarters.
However, in Q4 2019, it repurchased 6.1 million Class B shares at prices between $204 and $222, with over 50% bought at $218.62 a share. A quick calculation suggests it paid an average of $216.09 for those 6.1 million shares. As I write this, BRK.B is trading a few cents above $250. That’s a return on investment of 16% over 14 months, give or take.
Considering the shares’ market value has increased by 20.3% compounded annually between 1965 and 2019, those purchases have underperformed to date.
That said, Buffett also has said that for every shareholder that sells at “90 cents on the dollar,” the remaining shareholders “reap an increase in per-share intrinsic value.”
And besides, none of any of this would be possible if it weren’t for Buffett buying the original textile company in the first place.
SPDR S&P 500 ETF Trust (SPY)
It might be a bit of a stretch to say SPY is one of Buffett’s best stocks he’s bought over the past decade — it’s currently Berkshire’s third-smallest holding at $15.4 million — but it’s certainly had a part to play in the man’s understanding of the markets.
In the 2016 shareholder letter, Buffett revisits a 10-year bet he made with Protégé Partners co-manager Ted Seidos. Buffett wagered $500,000 that no investment pro could take at least five hedge funds and beat a low-cost Vanguard S&P index fund over a decade. Seidos jumped at the opportunity.
“For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager,” Buffett stated.
From 2008 through 2016, none of the five funds-of-funds could get anywhere close to the S&P index fund. A year later, the bet ended, and Buffett was victorious. The average annual return for the funds-of-funds was 3.0%, 550 basis points less than the S&P 500.
As Buffett stated in the 2017 shareholder letter, “Performance comes, performance goes. Fees never falter.”
It is the fees that do most investors in. That is why Buffett believes most people should stick to low-cost index funds like the SPY.
This next one isn’t even a publicly-traded company. However, it was when Berkshire offered to buy Burlington Northern Santa Fe (BNSF) for $44 billion in November 2009. Although Buffett offered $100 a share for BNSF cash, 40% of the purchase would be in Berkshire shares. The deal included $10 billion in debt.
Buffet reckoned in the 2009 shareholder letter that its shares were worth more than $40 (40% of $100 per share) at the time, so it was theoretically paying more than $100 to acquire the railroad. However, because it already owned 22.5% of BNSF stock, he and Vice Chairman Charlie Munger felt the actual cost in stock was closer to 30%, making the deal more palatable.
In 2011, the first full year owning BNSF, it generated $19.5 billion in revenue and $5.3 billion in operating earnings. In 2019, it had revenues of $23.5 billion and operating earnings of $7.3 billion, increases of 20.5% and 37.7%, respectively.
BNSF represented 25% of Berkshire’s non-insurance business’ operating income in 2019. On the sales front, it was only 9%, indicating just how important the railroad is to the company’s overall profits.
While BNSF got supplanted by Precision Castparts as Berkshire’s biggest acquisition when Buffett acquired it in 2016, the railroad is far more profitable than the industrial business.
As BNSF goes, so goes Berkshire.
Bank of America (BAC)
On pages 19 and 20 of the 2016 shareholder letter, Buffett discussed the company’s $5 billion preferred share investment in Bank of America in 2011.
“This stock, which pays us $300 million per year, also carries with it a valuable warrant allowing Berkshire to purchase 700 million common shares of Bank of America for $5 billion at any time before September 2, 2021,” Buffett wrote. “At yearend, that privilege would have delivered us a profit of $10.5 billion. If it wishes, Berkshire can use its preferred shares to satisfy the $5 billion cost of exercising the warrant.”
Today, BAC is the holding company’s second-largest equity position, valued at $37.5 billion as of Feb. 25. Berkshire holds 1.03 billion shares of the bank’s stock, good for an 11.9% stake.
While Buffett didn’t talk about Bank of America in its 2017 shareholder letter, he really should have because if there ever was a time to brag, that was it.
In June 2017, Berkshire Hathaway announced that it would exercise the warrants to buy 700 million shares of BAC stock. The exercise price was $7.18 a share, using the $5 billion preferred to complete the cashless transaction.
Since the exercise of the preferreds, Buffett’s added more than 300 million in BAC shares. Just the 700 million shares from the warrants would be worth $25.4 billion today, a compound annual growth rate of 17.7% over a decade. That doesn’t include the $300 million per year in preferred dividends between 2011 and 2017, or the common dividends thereafter.
American Express (AXP)
If you follow Berkshire, you know that American Express was one of the companies that Buffett used to refer to as its “Big Four,” the others being Coca-Cola (NYSE:KO), IBM (NYSE:IBM) and Wells Fargo (NYSE:WFC).
Berkshire first mentioned the Big Four in its 2011 shareholder letter. The last letter to reference the four companies was in 2015. Buffett pointed out in that 2015 letter that the company’s share in each of the companies amounted to $4.7 billion in 2015 earnings and $1.8 billion in dividends.
At the end of 2015, AXP had a market value of $10.5 billion and a cost of $1.3 billion for an unrealized gain of $9.2 billion. Coca-Cola’s gains were much higher at $15.9 billion ($17.2 billion market value minus $1.3-billion cost).
I opted for AXP over KO because Berkshire owned 18.7% of the former at the end of 2020 versus just 9.3% for the latter. Berkshire’s share of Amex’s retained earnings was $998 million in 2019 compared to $194 million for Coke.
Finally, at Feb. 25 prices, Berkshire’s American Express holdings were worth more than Coca-Cola, making Amex the third-largest holding with a market capitalization of $21.0 million.
Sadly, the other two components of the “Big Four” haven’t kept pace. Berkshire no longer owns IBM, and Wells Fargo’s fallen out of the top 10 to the 19th-largest position.
Despite Buffett’s belief in American business, one of Berkshire’s greatest investments of all time was in Chinese electric vehicle (EV) manufacturer BYD. However, you won’t find it listed in the BRK portfolio tracker. That’s because it’s owned by Berkshire Hathaway Energy and is traded on the Hong Kong Stock Exchange.
Buffett bought 225 million shares of BYD in 2008 at approximately 8 Hong Kong dollars per share. As I write this, the shares are trading at 216.20 Hong Kong dollars per share, a compound annual growth rate of 28.9%. In U.S. dollars, Berkshire made a $225 million investment. That investment is now worth $6.3 billion.
If BYD were listed in CNBC’s Portfolio Tracker, it would be Berkshire’s 9th-largest holding. Charlie Munger had many complimentary things to say about BYD founder and CEO Wang Chuanfu in a 2009 Fortune article.
“This guy is a combination of Thomas Edison and Jack Welch — something like Edison in solving technical problems, and something like Welch in getting done what he needs to do,” Munger said. “I have never seen anything like it.”
For a couple of guys (Munger, Buffett) who don’t have a reputation for loving high tech, they sure delivered a massive homerun for Berkshire shareholders.
The grief Buffett faced over his failed IBM investment has been long-forgotten by Berkshire shareholders, thanks to his all-in commitment to this iPhone maker’s stock.
Berkshire filed its Q4 2020 13F on Feb. 16. The first thing investors noticed was that the company reduced its exposure to Apple during the fourth quarter selling 57.2 million shares. The sale reduced Berkshire’s ownership stake in the world’s largest company to 5.4%.
But don’t get too worried that Buffett’s abandoning ship. The company still holds 907.6 million shares. At an annual dividend of 82 cents, it will receive $744 million from Apple in 2021.
Thinking back to discussions in previous years about how it’s not only getting a regular stream of dividends from companies such as Apple, it will also receive its fair share of retained earnings when it sells.
In the 2019 shareholder letter Berkshire’s share of retained earnings from Apple was higher than any of its other top 10 holdings. That’s the power of holding for the long haul.
I’m confident that Buffett’s doubling of its investment in Apple happened faster than most of its other equity investments. That’s an excellent thing if you own BRK stock.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.