Structure of Berkshire-Hathaway holdings

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pghbob
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Structure of Berkshire-Hathaway holdings

Post by pghbob »

As you may have heard, Warren Buffet's Berkshire-Hathaway fund is sufficiently large to require quarterly filing with the SEC of its holdings, including market to market for each them. The most recent is publicly available at
https://www.sec.gov/Archives/edgar/data ... 18337.xml
More about this at https://fintel.io/i13fs/berkshire-hathaway

I did some analysis of the most recent report. Of its 51 holdings, 82% of the value is 10 of them, with 42% of that in APPL. The rest of the smaller 41 holdings each account for an average of 0.43% of the portfolio value.

This struck me as odd, as the net performance of these smaller positions will probably average out to close to a broad market return. Even if they all beat the market, the total portfolio return will still be dominated by the top ten.

So, I'm wondering what possible rationale would explain the structure where 80% of holdings account for less than 20% of the portfolio's value. Why bother?
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Re: Structure of Berkshire-Hathaway holdings

Post by arcticpineapplecorp. »

1. if he'd generate cap gains for his shareholders by selling those 20% that have likely gained over the years, why sell them (unless he had losses he could realize to offset realized gains)?

2. Also, do you think his shareholders would be comfortable only having 10 holdings or 51?

3. Even Benjamin Graham had many companies he owned. However, most of them did fair to middling. The reason he beat the market was because he broke all of his own rules and took a concentrated bet on one company (and didn't necessarily wait til it was a cigar butt company to buy in). That company was...Geico.
If you look at Ben Graham’s lifetime performance, if you remove one investment that he made in GEICO, his performance is average. And by the way, buying GEICO broke every single rule that Ben Graham put in his own book.

And so, that is so fascinating. He writes this incredible book that all of us have read and so many people consider the Bible of investing. And the only reason that Ben Graham was successful was because he ignored all of that advice and did this thing that he never should have done.

The rules that he broke was he put a huge percentage of his net worth into GEICO and at the time the valuation that it was at, he broke all the rules that Ben Graham laid out in his book, but that’s the only reason he’s successful.

source: Morgan Housel: Most Of Your Investing Success Will Come From A Small Fraction Of Your Investments
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Logan Roy
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Re: Structure of Berkshire-Hathaway holdings

Post by Logan Roy »

pghbob wrote: Sun Nov 27, 2022 3:51 pm As you may have heard, Warren Buffet's Berkshire-Hathaway fund is sufficiently large to require quarterly filing with the SEC of its holdings, including market to market for each them. The most recent is publicly available at
https://www.sec.gov/Archives/edgar/data ... 18337.xml
More about this at https://fintel.io/i13fs/berkshire-hathaway

I did some analysis of the most recent report. Of its 51 holdings, 82% of the value is 10 of them, with 42% of that in APPL. The rest of the smaller 41 holdings each account for an average of 0.43% of the portfolio value.

This struck me as odd, as the net performance of these smaller positions will probably average out to close to a broad market return. Even if they all beat the market, the total portfolio return will still be dominated by the top ten.

So, I'm wondering what possible rationale would explain the structure where 80% of holdings account for less than 20% of the portfolio's value. Why bother?
My take on it – and noting that many large hedge funds (and my own portfolio) wind up structured in a similar way, with a 'long tail' of small positions:

1) Liquidity. With how long it took to build their position in Apple, you might want to be able to free up capital by selling smaller positions in large businesses, in which you're not a major shareholder.

2) Idea generation. Even their position in Apple started off as a small position. Sometimes these small positions will become much larger positions on their own – which is the logic index funds work on, and do very well with – and I always find owning positions justifies the work of keeping up to date with them; keeping them on your radar.

3) BRK has lots of money managers (afaik), and you'd usually start out managing a small amount of money. So they're trying to run their books as profitable parts of the business. And this is where you might develop and identify future talent. (With a regular hedge fund, a portfolio may be running multiple strategies, and have a dozen traders manage their own books. So my 10% position might be the portfolio's 0.2% position.)

4) M&A trades. Buffett's done a fair bit of M&A trading. So this might be buying positions in businesses that look like they might be acquired, and bump the share price up. These can be relatively short-term trades.

5) Size limits of alpha. When your large holdings have to be some of the world's largest businesses, it may be easier to generate alpha in smaller portfolios, with smaller positions. Buffett himself has talked of how he makes much higher profits in the smaller parts of BRK (citing up to 50% annual returns).
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Re: Structure of Berkshire-Hathaway holdings

Post by JoMoney »

pghbob wrote: Sun Nov 27, 2022 3:51 pm... Warren Buffet's Berkshire-Hathaway fund is sufficiently large to require quarterly filing with the SEC of its holdings...
Berkshire Hathaway is a publicly traded company, and has to report it's balance sheets similar to every other company that is a publicly traded stock. It is not a "fund" (a.k.a Regulated Investment Company), which would have other different requirements/regulations, disclosures, as well as different taxation passed through.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Structure of Berkshire-Hathaway holdings

Post by seajay »

On a separate note, a prior competitive advantage of Berkshire's large insurance float, premiums received in lieu of claims later being payed out, was lost in a 0% interest rate era. With rising interest rates that 'free money' competitive advantage will once again be restored.

Maybe some of the smaller holdings are transitory 'free money' plays, not core money, or core longer term holdings.
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Re: Structure of Berkshire-Hathaway holdings

Post by toddthebod »

pghbob wrote: Sun Nov 27, 2022 3:51 pm As you may have heard, Warren Buffet's Berkshire-Hathaway fund is sufficiently large to require quarterly filing with the SEC of its holdings, including market to market for each them. The most recent is publicly available at
https://www.sec.gov/Archives/edgar/data ... 18337.xml
More about this at https://fintel.io/i13fs/berkshire-hathaway

I did some analysis of the most recent report. Of its 51 holdings, 82% of the value is 10 of them, with 42% of that in APPL. The rest of the smaller 41 holdings each account for an average of 0.43% of the portfolio value.

This struck me as odd, as the net performance of these smaller positions will probably average out to close to a broad market return. Even if they all beat the market, the total portfolio return will still be dominated by the top ten.

So, I'm wondering what possible rationale would explain the structure where 80% of holdings account for less than 20% of the portfolio's value. Why bother?
How is this any different than the stock market as a whole? Approximately 4% of stocks are responsible for all stock market growth in an average year. We aren't clairvoyant, so we buy the whole market to guarantee we own those 4%. Buffett isn't clairvoyant either.

Here's another way to think about it: VTSAX holds stock in 4,028 companies right now. The 500 largest holdings represent about 85% of the value. What possible rationale would explain the structure where 88% of VTSAX's holdings account for less than 15% of the portfolio's value. Why bother?
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pghbob
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Re: Structure of Berkshire-Hathaway holdings

Post by pghbob »

@todthebod: I'm assuming the BH portfolio is the result of a full-time research group, a battle-tested investment thesis, and active management. The other portfolios you mention bypass all that by owing a much larger number holdings of a certain type and do not use other screening criteria. In effect, they don't bother. They passively (and automatically) buy the whole dart board, instead of a few points in a few sections.
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Re: Structure of Berkshire-Hathaway holdings

Post by toddthebod »

pghbob wrote: Mon Nov 28, 2022 9:50 am @todthebod: I'm assuming the BH portfolio is the result of a full-time research group, a battle-tested investment thesis, and active management. The other portfolios you mention bypass all that by owing a much larger number holdings of a certain type and do not use other screening criteria. In effect, they don't bother. They passively (and automatically) buy the whole dart board, instead of a few points in a few sections.
I do not believe that a "full-time research group, a battle-tested investment thesis, and active management" is a guarantee to beat the market or reliably pick winners. I don't think you believe that, either, or you'd have all of your equity investment in Berkshire and not in a broad market index fund.

BH's logic is the same as any venture capital fund or any intelligent investor: invest in enough companies that you end up with a few winners that will result in overall growth. Literally every successful investment fund has a few big winners and a bunch of, if not outright losers, mediocre or poorly returning companies.
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Re: Structure of Berkshire-Hathaway holdings

Post by chassis »

Logan Roy wrote: Sun Nov 27, 2022 9:29 pm
pghbob wrote: Sun Nov 27, 2022 3:51 pm As you may have heard, Warren Buffet's Berkshire-Hathaway fund is sufficiently large to require quarterly filing with the SEC of its holdings, including market to market for each them. The most recent is publicly available at
https://www.sec.gov/Archives/edgar/data ... 18337.xml
More about this at https://fintel.io/i13fs/berkshire-hathaway

I did some analysis of the most recent report. Of its 51 holdings, 82% of the value is 10 of them, with 42% of that in APPL. The rest of the smaller 41 holdings each account for an average of 0.43% of the portfolio value.

This struck me as odd, as the net performance of these smaller positions will probably average out to close to a broad market return. Even if they all beat the market, the total portfolio return will still be dominated by the top ten.

So, I'm wondering what possible rationale would explain the structure where 80% of holdings account for less than 20% of the portfolio's value. Why bother?
My take on it – and noting that many large hedge funds (and my own portfolio) wind up structured in a similar way, with a 'long tail' of small positions:

1) Liquidity. With how long it took to build their position in Apple, you might want to be able to free up capital by selling smaller positions in large businesses, in which you're not a major shareholder.

2) Idea generation. Even their position in Apple started off as a small position. Sometimes these small positions will become much larger positions on their own – which is the logic index funds work on, and do very well with – and I always find owning positions justifies the work of keeping up to date with them; keeping them on your radar.

3) BRK has lots of money managers (afaik), and you'd usually start out managing a small amount of money. So they're trying to run their books as profitable parts of the business. And this is where you might develop and identify future talent. (With a regular hedge fund, a portfolio may be running multiple strategies, and have a dozen traders manage their own books. So my 10% position might be the portfolio's 0.2% position.)

4) M&A trades. Buffett's done a fair bit of M&A trading. So this might be buying positions in businesses that look like they might be acquired, and bump the share price up. These can be relatively short-term trades.

5) Size limits of alpha. When your large holdings have to be some of the world's largest businesses, it may be easier to generate alpha in smaller portfolios, with smaller positions. Buffett himself has talked of how he makes much higher profits in the smaller parts of BRK (citing up to 50% annual returns).
Agree on the above. Correlation among portfolio holdings is another factor.
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Re: Structure of Berkshire-Hathaway holdings

Post by Logan Roy »

toddthebod wrote: Mon Nov 28, 2022 11:04 am
pghbob wrote: Mon Nov 28, 2022 9:50 am @todthebod: I'm assuming the BH portfolio is the result of a full-time research group, a battle-tested investment thesis, and active management. The other portfolios you mention bypass all that by owing a much larger number holdings of a certain type and do not use other screening criteria. In effect, they don't bother. They passively (and automatically) buy the whole dart board, instead of a few points in a few sections.
I do not believe that a "full-time research group, a battle-tested investment thesis, and active management" is a guarantee to beat the market or reliably pick winners. I don't think you believe that, either, or you'd have all of your equity investment in Berkshire and not in a broad market index fund.

BH's logic is the same as any venture capital fund or any intelligent investor: invest in enough companies that you end up with a few winners that will result in overall growth. Literally every successful investment fund has a few big winners and a bunch of, if not outright losers, mediocre or poorly returning companies.
Of course the purpose of free markets is that the market as a whole is acting as that 'full-time research group' – maybe the most complex distributed research project ever built – ensuring that everything's priced about right, whether you own the whole market or just a tiny bit of it.

The way I like to think of BRK is you're invested in businesses that tick a lot of boxes. Profitable, cash-generative, competitive advantages, etc. So if there are 10,000 different ways the economy can go from here, the majority of those businesses are probably going to do reasonably well over 20 years, and you're probably going to grow your investment.

I think the stock market's a bit more of a wildcard. I don't think BRK could've ever looked like the Japanese market did in 1990, or the US market in 2000. But it's also got issues with size. It's 300x larger than a lot of portfolios ever get before performance trails off, and almost half the company's assets are in bonds and T-bills. So I wouldn't bet on it to beat the market anymore. But I would bet on it to generally avoid a lot of problems markets encounter.
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Re: Structure of Berkshire-Hathaway holdings

Post by seajay »

Logan Roy wrote: Mon Nov 28, 2022 3:31 pmBut it's also got issues with size. It's 300x larger than a lot of portfolios ever get before performance trails off, and almost half the company's assets are in bonds and T-bills.
Napkin math : Market cap 690Bn. Price to Book 1.5, book value 460Bn. 25Bn in cash/equivalents, 75Bn in Treasuries (bills). 100Bn of 460Bn book value, 22%. Is there really another 100Bn of Bonds in its holdings?
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Re: Structure of Berkshire-Hathaway holdings

Post by Logan Roy »

seajay wrote: Mon Nov 28, 2022 4:31 pm
Logan Roy wrote: Mon Nov 28, 2022 3:31 pmBut it's also got issues with size. It's 300x larger than a lot of portfolios ever get before performance trails off, and almost half the company's assets are in bonds and T-bills.
Napkin math : Market cap 690Bn. Price to Book 1.5, book value 460Bn. 25Bn in cash/equivalents, 75Bn in Treasuries (bills). 100Bn of 460Bn book value, 22%. Is there really another 100Bn of Bonds in its holdings?
I've got them on $147bn cash on hand, as of 3 days ago. I'm also doing some very vague mental maths, but you'd also factor in the cash reserves of their major holdings – e.g. Apple and BoA. I think it might be about 30-33% now, but it has been closer to a half in recent years.
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Re: Structure of Berkshire-Hathaway holdings

Post by seajay »

Logan Roy wrote: Mon Nov 28, 2022 4:53 pm
seajay wrote: Mon Nov 28, 2022 4:31 pm
Logan Roy wrote: Mon Nov 28, 2022 3:31 pmBut it's also got issues with size. It's 300x larger than a lot of portfolios ever get before performance trails off, and almost half the company's assets are in bonds and T-bills.
Napkin math : Market cap 690Bn. Price to Book 1.5, book value 460Bn. 25Bn in cash/equivalents, 75Bn in Treasuries (bills). 100Bn of 460Bn book value, 22%. Is there really another 100Bn of Bonds in its holdings?
I've got them on $147bn cash on hand, as of 3 days ago. I'm also doing some very vague mental maths, but you'd also factor in the cash reserves of their major holdings – e.g. Apple and BoA. I think it might be about 30-33% now, but it has been closer to a half in recent years.
Thanks
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Re: Structure of Berkshire-Hathaway holdings

Post by jodhpur »

Berkshire doesn't have many money managers per se. Warren manages the vast majority and Ted/Todd have smaller pockets of money. Munger, of course, has some role--but it's fairly well documented that Buffett can/will do large moves without consulting him. And Todd/Ted seem to be able to act very independently as well. Not sure of the exact roles of Ajit and Greg--other than running the insurance and operations--but Greg should be CEO one day. I don't know how to quantify it, but the tax efficiency of BRK is pretty unique (they've kicked the tax bill pretty far down the road). And their importance in the Treasury market is pretty huge. When people/companies need the safety of Treasuries, I think BRK is a willing seller, but also buying equities as they get offloaded.
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Re: Structure of Berkshire-Hathaway holdings

Post by Boglegrappler »

So, I'm wondering what possible rationale would explain the structure where 80% of holdings account for less than 20% of the portfolio's value. Why bother?
Back in early 2020 I did some excel exercises to take a look at some of the observations about concentrations of value in the S&P 500 index. I went back to those sheets and what you find is that the top 50 companies in market value account for about 50% of the total. So that's ten percent of the companies accounting for 50%. If you take the top 100 companies, they accounted for about 66% of the total value. Might not be quite the same today, but likely is not far off.

The concentration seemed generally rational too, since, when looking at things like revenue and net income, there were similar concentrations.
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Re: Structure of Berkshire-Hathaway holdings

Post by Logan Roy »

jodhpur wrote: Mon Nov 28, 2022 8:18 pm Berkshire doesn't have many money managers per se. Warren manages the vast majority and Ted/Todd have smaller pockets of money. Munger, of course, has some role--but it's fairly well documented that Buffett can/will do large moves without consulting him. And Todd/Ted seem to be able to act very independently as well. Not sure of the exact roles of Ajit and Greg--other than running the insurance and operations--but Greg should be CEO one day. I don't know how to quantify it, but the tax efficiency of BRK is pretty unique (they've kicked the tax bill pretty far down the road). And their importance in the Treasury market is pretty huge. When people/companies need the safety of Treasuries, I think BRK is a willing seller, but also buying equities as they get offloaded.
Oddly, I can't find an article detailing this. But if you go on LinkedIn, you'll find Berkshire Hathaway has quite a few people employed as portfolio managers and fund managers. I won't list names, but I think there are quite a few people managing money.
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Re: Structure of Berkshire-Hathaway holdings

Post by Caduceus »

pghbob wrote: Sun Nov 27, 2022 3:51 pm
So, I'm wondering what possible rationale would explain the structure where 80% of holdings account for less than 20% of the portfolio's value. Why bother?
I recommend reading Alice Schroeder's The Snowball and Lowenstein's The Making of an American Capitalist if you want to get a sense of why Berkshire is structured the way that it is.

The first reason is that Buffett thinks of the companies he acquires as a form of promise to a partner. Berkshire is often a place for companies that want a long term home. He usually retains the same management and changes very little; the main difference before and after joining Berkshire is that all excess cash goes to Buffett for capital allocation. That's it. So, companies like Iscar or Clayton Homes are made a promise by Buffett that they will have free rein to run their companies as they see fit - they no longer need to worry about Wall Street or financing and can focus on making the best long-term strategic decisions. He sees this as a form of commitment that he made at the point of sealing the deal, and it is a matter of his own integrity that he sticks to it. He doesn't think the same way about investments in stocks. So he can sell Wells Fargo or Apple or Bank of America - these are "passive" investments. But companies that do join Berkshire he conceives of it as akin to a marriage.

The second is that these smaller companies are often the fantastic ones. Someone - I think it was Cunningham - presented the financial numbers on See's Candies. It's tiny by Berkshire's standards, but it has fantastic returns on equity. The problem is that chocolate companies aren't scalable, so Buffett can't re-invest the profits into See's and see decent incremental returns. So See's stays small, but insanely profitable. Tiny See's has actually financed the purchase of a lot of Berkshire's investments - something he's noted in his letters to Berkshire's shareholders.

Third, Berkshire has a very decentralized structure. So it's not burdensome to have such a wide range of companies - it's not structured the way GE as a conglomerate would be structured. The individual companies have a great deal of autonomy. He only talks to some CEOs once or twice a year. They simply go on running the business like it used to. Buffett doesn't like buying things that require huge amounts of re-working; if he's identified a business with great economics and management, his instinct is to leave them alone since they already have proven they can succeed.
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Re: Structure of Berkshire-Hathaway holdings

Post by nedsaid »

arcticpineapplecorp. wrote: Sun Nov 27, 2022 4:17 pm 1. if he'd generate cap gains for his shareholders by selling those 20% that have likely gained over the years, why sell them (unless he had losses he could realize to offset realized gains)?

2. Also, do you think his shareholders would be comfortable only having 10 holdings or 51?

3. Even Benjamin Graham had many companies he owned. However, most of them did fair to middling. The reason he beat the market was because he broke all of his own rules and took a concentrated bet on one company (and didn't necessarily wait til it was a cigar butt company to buy in). That company was...Geico.
If you look at Ben Graham’s lifetime performance, if you remove one investment that he made in GEICO, his performance is average. And by the way, buying GEICO broke every single rule that Ben Graham put in his own book.

And so, that is so fascinating. He writes this incredible book that all of us have read and so many people consider the Bible of investing. And the only reason that Ben Graham was successful was because he ignored all of that advice and did this thing that he never should have done.

The rules that he broke was he put a huge percentage of his net worth into GEICO and at the time the valuation that it was at, he broke all the rules that Ben Graham laid out in his book, but that’s the only reason he’s successful.

source: Morgan Housel: Most Of Your Investing Success Will Come From A Small Fraction Of Your Investments
LOL!!! LOL!!! LOL!!!

On a serious note, this is why I have always disliked mechanical investing strategies. There is a built in assumption that there are certain constants in the markets and in the economy, in fact both are dynamic. I do have an Investment Policy Statement but I have always reserved the right to deviate from it if circumstances warranted. For example, my preferred asset allocation is 60% stocks/40% fixed income but I allowed the percentage of stocks within the portfolio to drift higher than that because of very low interest rates at the time.

What this shows is that we all are human. Graham probably saw incredible opportunity and broke his own rules in order to take advantage of it. It would be fun to know more about why he did this.
A fool and his money are good for business.
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