As Warren Buffett turns 91, seasoned investor prepares Berkshire Hathaway for a new economy

As Warren Buffett turns 91, seasoned investor prepares Berkshire Hathaway for a new economy

Warren Buffett walks the showroom as he gathers to hear from the billionaire investor at Berkshire Hathaway’s annual meeting in 2019.

Scott Morgan | Reuters

Warren Buffett, who turned 91 on Monday, is taking steps to ensure Berkshire Hathaway – and his eventual successor – will be in a better position to benefit from a tech-driven economy.

The operational activity of the group is a mosaic of companies focused on the traditional backbone of the economy, from railways to batteries, insurance, furniture and retail. Due to the old economic focus, Berkshire missed the explosive growth seen in the global Amazon over the years. But “the Oracle of Omaha” shows its openness to investments that have moved away from the heart of the old Berkshire economy to adapt to the new world.

Berkshire’s exposure to tech stocks has grown to 45% of its portfolio, according to InsiderScore.com, thanks to its large stake in Apple. Its investment in Apple, which was first purchased in 2016, rose to more than $ 120 billion to become the largest equity stake of all time. Ten years ago, Berkshire’s major holdings of equities had little technical exposure other than IBM.

Meanwhile, to bet on growth, Berkshire has dipped its toe into initial public offerings and pre-IPO investments, which the seasoned investor has once joked about. It is widely believed that Buffett’s investment lieutenants Todd Combs and Ted Weschler settled these bets, breaking with Berkshire tradition.

“The investment portfolio has undergone a significant change. Now it’s really on the path to the new economy, ”said James Shanahan, Berkshire analyst at Edward Jones. “They gave Todd Combs and Ted Weschler a lot of flexibility and opportunities to get their fingerprints on the company.”

Berkshire invested in Brazilian fintech Stoneco days after its IPO in 2018, and the share price has doubled since its debut on the market to more than $ 700 million. During that year, Berkshire also bought a stake in India’s largest digital payments startup, Paytm, which has filed for an IPO.

In the third quarter of 2020, the group purchased $ 250 million of Snowflake shares at the IPO price and an additional 4.04 million shares from another shareholder at the first price. In June of this year, Berkshire invested $ 500 million ahead of the IPO in the parent company of NuBank, a Brazil-based digital bank.

Buffett, the man who pioneered buy and hold investing, expressed his distaste for buying companies when they first started out in the market. Buffett has previously likened buying successful IPOs to trying to win the lottery, arguing that they don’t provide a solid base for investing. The last major IPO Buffett bought before the recent frenzy was Ford’s debut in 1956.

“The equity portfolio is more dynamic with TODs today than it was 10 or 15 years ago,” said Cathy Seifert, Berkshire analyst at CFRA Research. “They’re definitely going to dip their toes in water and munch on new economy stocks. It is difficult to generate alpha unless there is some exposure, especially a bias towards large cap prices. “

By increasing its technical exposure to around 45%, Berkshire recently dropped some of its biggest financial bets, including JPMorgan Chase, Wells Fargo and PNC Financial. The group still has significant stakes in American Express and Bank of America at the end of June.

$ 100 billion question

For Buffett’s die-hard watchers, they ask themselves the same question year after year: when will he finally complete this “elephant-sized” acquisition? The answer can be disappointing for many, given their disciplined approach to value.

Gregory Warren, Berkshire analyst for Morningstar, said: “I think what keeps him from doing anything too aggressive is that he hardly wants to close the last deal he makes – for which he is remembered. Will – will be a disaster. . “He doesn’t want to cripple the next guy to lead the show by doing something that probably won’t help him.”

At the end of June, Berkshire’s cash flow stood at $ 144 billion, close to a record despite the firm’s massive buyout program.

For decades, companies have dabbled in Buffett, the biggest whale with the most money, as well as private equity firms. Although unlike leveraged acquisitions with rapid turnover, Berkshire has always been a more permanent buyer who also gives companies the autonomy to run their businesses.

However, private equity has seen a tear in recent years with interest rates at record highs, and companies are also attracted by an influx of new buyers from specialist acquisition companies, or PSPCs, possibly with deals. more attractive.

Meanwhile, the market valuation is close to pre-Dotcom bubble levels. Specifically, the utilities and transmission segment, in which Berkshire wants to be a consolidator, has become overpriced as these stocks are becoming household names for yield-hungry investors, according to Morningstar’s Warren.

“The fact that Berkshire didn’t have a successful deal, I don’t think investors are going to hang on to it,” Seifert said. “I think they still rely on their judgment and skill, especially where the evaluations are right now.”

record redemption

Rather than closing a deal, Berkshire focused on returning capital to shareholders. The company repurchased $ 6 billion of its own shares in the second quarter, bringing its six-month total to $ 12.6 billion. Berkshire bought a record $ 24.7 billion of its own shares last year.

“It’s been a long time coming,” Warren said. “The only option for them if they don’t want the cash balance to keep growing is to keep buying stocks. This is probably the best option for additional short-term liquidity until we have some sort of market correction. “

Thanks to share buybacks, Berkshire class B shares quickly wiped out losses from the pandemic and are back at an all time high. Stocks gained around 23% in 2021.

Buffett first started the buyback program in 2011, and has long preferred to buy the stocks and companies of other companies. At the 1999 annual meeting, Buffett said he would not buy back Berkshire shares unless they were “depreciated quite dramatically”.

In 2018, the company’s board of directors announced the removal of its redemption limit, to allow purchases whenever it feels the price is “below Berkshire’s intrinsic value.”

Warren said, “I think he does a good job of navigating and returning capital to shareholders. He understands that his legacy was not only appreciated in the first 50 years, but what he has done in the past five years. Was.” .

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