Because the press and stock-market pundits like headlines that begin “Buffett Buys…,” big-type assertions of that precise kind often appear. But such headlines are all too often wrong, for the simple reason that other people besides Buffett do some of the buying at Berkshire Hathaway. Moreover, the confusion has compounded in the last couple of years.
For many years Lou Simpson was the other buyer besides Buffett. Purchases that he made were often attributed to Buffett. I well remember the 2007 day that Fortune’s automobile writer, Alex Taylor, called me in astonishment, asking, “Buffett is buying Carmax stock?” No, I said, the relatively small size of the stake—around $260 million—suggested the buyer was Simpson. Alex checked out the facts and got a nice story out of Buffett-it-wasn’t, Simpson-it-was.
Simpson retired from Berkshire (BRKA) in 2010. But as he was leaving, taking with him salutes and thanks from Buffett, into Berkshire came new hire Todd Combs, who had previously run Connecticut hedge fund Castle Point Management. (See also: Welcome to Omaha, Todd Combs). Combs made his purchases for Berkshire throughout 2011. When Berkshire filed its 13Fs with the SEC, there were suddenly headlines that said “Buffett Buys MasterCard,” or Visa, or Dollar General (DG). Alas, those were all Combs’ purchases, not Buffett’s.
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Later in 2011, Buffett hired Ted Weschler, who was then running a Charlottesville, Virginia, hedge fund called Peninsula Capital Advisors, to join the Berkshire investment team. (See also: Meet Ted Weschler: Buffett auction winner, Berkshire’s new hire). Weschler proceeded to start shutting down his fund, planning to do that by early 2012. He had certain stocks in his old fund that he wanted to have in his new Berkshire portfolio. So he secured Buffett’s okay to simply transfer some of his stocks to Berkshire, doing that in the last weeks of 2011. These were to be the beginnings of the Berkshire portfolio that Weschler will run and that is expected to be about the size of Combs’ portfolio, which is now at the $1.75 billion level.
When Berkshire’s 13F filing for yearend 2011 was made a few weeks ago, headlines began to appear that said, “Buffett Buys DirecTV,” or DaVita (which runs kidney dialysis centers), or Liberty Media. Not true insofar as Buffett is concerned. All of those are Weschler positions, transferred over from Peninsula in its final days.
So if Buffett wasn’t buying DirecTV (DTV) in 2011 or Visa (V) or any of the others described above, what was he buying? The huge answer, as everybody has known for a while, is IBM (IBM), into which Berkshire poured close to $11 billion in 2012. By the end of the year, Berkshire had a gain of about $900 million in Big Blue.
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Buffett singled out three other investments for special comment in his chairman’s letter. One was an addition of $1 billion that Berkshire made to its already large holdings of Wells Fargo (WFC), raising its cost basis to just over $9 billion and its ownership of the company to 7.6%. Buffett described banking as “back on its feet” and Wells as “prospering.”
A second financial investment was $5 billion of preferred stock in Bank of America (BAC) that came with warrants allowing Berkshire to buy 700 million common shares at $7.14 per share anytime before September 2, 2021. Bank of America stock is currently selling at about $8 per share. Says Buffett of this investment: “Our warrants will likely be of great value before they expire.”
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Of the third Berkshire investment, Buffett has absolutely nothing good to say. In his letter, he concedes that he completely blew things a few years ago by putting around $2 billion into several high-yield bond issues of utility operation Energy Future Holdings (which in its former life, before it was taken private by KKR and others, was called TXU). Had the price of natural gas risen and given EFH an opportunity to make good money off its coal-burning plants, the company’s bonds would have been golden. Instead, the price of natural gas has nosedived and turned EFH into a financial disaster.
Berkshire wrote down its EFH investment by $1 billion in 2010 and by another $390 million in 2011. Buffett is blunt in assessing his judgment in this matter: “However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman.”
The writer of this article, FORTUNE senior editor-at-large Carol Loomis, is a longtime friend of Warren Buffett’s and a shareholder of Berkshire Hathaway. She has been the pro bono editor of Buffett’s annual letter to shareholders for 35 years.
