Who is the best investor in the world? Warren Buffett and Carl Icahn are typically at the top of the list.
The answer is obvious to the majority of investors. It’s Warren Buffett.
Buffett holds as the apotheosis of value investing.
Buffett is consistently at or near the top of the Forbes 400. He ranks third according to the latest tally, with an $89 billion net worth. The media hang on his every word; investors mimic his every investment.
To be sure, Buffett seeks value in his investments, as we all do, but he’s no longer a value investor as the term has been traditionally applied. Buffett rarely seeks value in contrarian price-depressed investments.
My observation is evinced by Berkshire’s largest publicly traded investments: Apple (NASDAQ: AAPL), Kraft Heinz (NASDAQ: KHC), Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), and Coca-Cola (NYSE: KO). This is the stuff of every large-cap growth mutual fund manager.
Vet the new additions over the past five years, and only one stands out as a convincing value investment in the contrarian tradition. That’s Teva Pharmaceuticals (NYSE: TEVA), purchased in the fourth quarter of 2017.
Berkshire Hathaway (NYSE: BRK.b) bought 18.9 million Teva shares. (Truth be told, they were likely bought at the behest of top lieutenants Todd Combs or Ted Weschler.) The shares are valued at $330 million. That’s a lot to you and me. In the grand scheme of Berkshire’s investment portfolio, it slots at number 35.
Buffett’s strategy over the past 25 years is to allocate large sums to large publicly traded companies. The physics of size dictate the strategy: Given Berkshire Hathaway’s considerable girth and hefty cash account, Buffett really has no choice but to target large-cap growth companies.
Therefore, I would classify Buffett as a large-cap growth investor.
Traditional value investing focuses on “troubled” companies, of which every company becomes. I’ve frequently mentioned that there are two types of companies: ones that have troubles and ones that are going to have troubles. Value investing is focused on the former – those that have troubles.
Value investing is also associated, though somewhat more loosely, with a concentrated investing style. That is the investment portfolio is concentrated in fewer investments, as opposed to a wide swath of investments that most funds, and even Berkshire, hold.
I’m treading on hallowed ground. I’m sure more than a few readers will cavil with my classification of Buffett’s investing style; fair enough.
But I know one point where no one can quibble: Warren Buffett no longer practices concentrated investing. Berkshire is invested in or directly owns over 100 different business spread across most sectors of the economy.
If you know what you’re doing, and you can pull it off, a concentrated strategy can be a very profitable strategy.
The more concentrated the portfolio, the greater the likelihood returns will differ significantly from the market average. Investors with competence to analyze a few businesses in detail and the ability to identify value-priced businesses will be able to outperform the market dramatically.
If we return to the late 1970s and follow Berkshire through the subsequent decade, through the 1980s, we find that Buffett ran a very concentrated investment portfolio: six to 10 common stock investments were the norm. Fewer wasn’t out of the ordinary.
In 1987, Berkshire was so concentrated it ran a portfolio of basically three stocks: Washington Post Group (NYSE: WPO), Geico (which Berkshire now wholly owns), and Capital Cities/ABC, now a division of Disney (NYSE: DIS).
During those years, Berkshire bought and sold a number of value companies (a few are no longer values today, because they longer exist). Many, I’m sure, whose names are unfamiliar: Handy & Harmon, Interpublic Group (NYSE: IPG), Kaiser Aluminum, Ogilvy & Mather, Knight-Ridder, Time, Alcoa (NYSE: AA), F.W. Woolworth.
Value coupled with a concentrated investment strategy produced extraordinary returns.
You could have bought a share of Berkshire Hathaway for $132 in 1977. You could have sold that same share for $8,750 in 1989. Your investment would have compounded at a 42% average annual rate over those 12 years.
Since Berkshire switched to a large-cap growth, diversified portfolio strategy, it has failed to come close to compounding wealth at such an impressive rate.
Berkshire is basically a well-run large-cap growth fund, which isn’t bad. Berkshire shares are up 90% over the past five years. Its benchmark, the S&P 500, is up 75%. (The return on the S&P 500 improves with dividends, which Berkshire doesn’t pay.) Over the past two years, Berkshire is up 37%, the S&P 500 has gained 33%.
Large-cap growth has run the table for the past five years. Berkshire shares have kept pace.
I’ll examine Carl Icahn’s performance and investing strategy in part II.
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