TIME psychology

How Warren Buffett Keeps Up With Information

Warren Buffett in an interview on May 4, 2015.
Lacy O'Toole—CNBC/NBCU Photo Bank via Getty Images Warren Buffett in an interview on May 4, 2015.

Shane Parrish writes Farnam Street

It's about having filters

A telling excerpt from an interview of Warren Buffett (below) on the value of reading. Seems like he’s taking the opposite approach to Nassim Taleb in some ways.

Interviewer: How do you keep up with all the media and information that goes on in our crazy world and in your world of Berkshire Hathaway? What’s your media routine?

Warren Buffett: I read and read and read. I probably read five to six hours a day. I don’t read as fast now as when I was younger. But I read five daily newspapers. I read a fair number of magazines. I read 10-Ks. I read annual reports. I read a lot of other things, too. I’ve always enjoyed reading. I love reading biographies, for example.

Interviewer: You process information very quickly.

Warren Buffett: I have filters in my mind. If somebody calls me about an investment in a business or an investment in securities, I usually know in two or three minutes whether I have an interest. I don’t waste any time with the ones which I don’t have an interest.

I always worry a little bit about even appearing rude because I can tell very, very, very quickly whether it’s going to be something that will lead to something, or whether it’s a half an hour or an hour or two hours of chatter.

This piece originally appeared on Farnam Street.

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MONEY mutual funds

Everything You Need to Know About The Fidelity Contrafund Mutual Fund

William Danoff, vice president of Fidelity Management & Research
Scott Eells—Bloomberg via Getty Images William Danoff has been managing Fidelity's Contrafund for nearly a quarter century.

How this gigantic fund has consistently beaten its peers over the last 5 years.

Fidelity Contrafund isn’t contrarian in the way that you might think. Contrarians are fearless and independent, buying stocks the herd hates. But who on Wall Street dislikes Berkshire Hathaway, Contrafund’s largest holding? Or Apple, its second-largest position?

Yet there’s one counterintuitive thing Will Danoff, the fund’s skipper for 24 years, has accomplished. While big funds often lag, this $110.7 billion portfolio—now larger than Fidelity Magellan was at its peak—has still beaten two-thirds of its peers over the past five years. How much longer can Danoff keep it up?

Money

How It’s Different

Morningstar classifies this portfolio as a large growth stock fund. But Contrafund has some latitude, as exemplified by its big stake (4.7% of assets) in Berkshire Hathaway. The insurance-heavy conglomerate run by Warren Buffett isn’t exactly a high-flying growth stock. Neither is another holding, Wells Fargo, the conservatively run megabank.

Fear not. While Contrafund has an outsize stake in value-oriented financials, it doesn’t stray too far afield. Among its other top holdings are growth stalwarts Facebook and Biogen, and the fund bought Alibaba on its initial public offering. Tech, which is the biggest sector for growth portfolios, represents about 24% of the fund, just a tad below the 25% average for large growth funds.

 

Money

Danoff’s Defensive Moves

What distinguishes Danoff as a manager? He does well when the market doesn’t, and that’s helped the fund over time. Contrafund outperformed large growth funds in the two major bear markets of this century, which has allowed the fund to clobber its peers by 1.6 percentage points a year over the past decade.

Still, “for a contrarian, the most difficult moment is investing in a market that has gone well,” says Jim Lowell, editor of Fidelity Investor. Sure enough, Contrafund has been about average over the past three years. The fund has made some good defensive moves, downshifting from an 8.6% stake in energy in 2011 to 2% now. But don’t expect to see Contrafund among the top gainers when the market soars, Lowell says.

Money

A Question of Size

One big elephant in the room is Contrafund’s elephantine size: It is the second-largest actively managed stock portfolio, behind only American Funds Growth Fund of America. Plus, Danoff has led this fund for nearly a quarter-century, when the average manager tenure is 5½ years.

Fidelity does have a massive staff of analysts. And Danoff “doesn’t exhibit any signs of weariness or burnout,” says Lowell. But there’s no denying this fund is enormous, which means buying small, fast-growing companies won’t do it much good. If you’re okay with just blue-chip names, this is “a fund with a well-proven manager, strong risk-adjusted returns, and low expenses,” says Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

(Note: Losses are from March 24, 2000, to Oct. 9, 2002, and Oct. 9, 2007, to March 9, 2009. Source: Morningstar)

MONEY Ask the Expert

The Best Way To Buy Stocks Warren Buffett Likes

Investing illustration
Robert A. Di Ieso, Jr.

Q: I’d like information on the “dividend aristocrats” that Warren Buffett has talked about. Should I buy them through a fund or a direct purchase plan? — Sheron Milliner

A: There’s no hard-and-fast rule about what stocks qualify as “dividend aristocrats,” but the moniker typically refers to companies that have consistently paid and raised their dividends — without fail — for at least several consecutive years.

The exact number of years is up for debate. Standard & Poor’s runs several equity indexes that track these types of companies. One benchmark that focuses on S&P 500 companies requires at least 25 consecutive years of dividend increases; a broader-based U.S. index looks for stocks that have boosted their payouts for 20 years or more; and a European version defines a dividend aristocrat as a stock that has boosted its payments for at least 10 straight years.

The dividend itself doesn’t have to be that large either — “it just has to be sustainable,” says Ron Weiner, CEO of investment advisory firm RDM Financial Group. “A company is showing its confidence in growth by increasing dividends as opposed to doing a one-time stock buyback or cash distribution.”

Companies that qualify as aristocrats tend to be value-oriented blue chips — think PepsiCo PEPSICO INC. PEP 0.15% , Johnson & Johnson JOHNSON & JOHNSON JNJ -0.03% , and Walmart WAL-MART STORES INC. WMT 0.01% — as opposed to high-flying newbies.

That said, a company’s place in the court isn’t guaranteed. Banks were for many years dividend aristocrats, but many cut their payouts in the aftermath of the financial crisis.

For that reason – and for the sake of diversification – Weiner’s advice to investors interested in this strategy is to look for an exchange-traded fund (ETF) or mutual fund that focuses on dozens or hundreds of companies with track records for paying and boosting their dividends.

The SPDR S&P Dividend ETF (SDY), for example, limits its universe to stocks that have increased their dividends for 20 consecutive years. Again, this isn’t to say it’s a forgone conclusion that these companies will continue to up their payouts. As Morningstar analyst Michael Rawson notes, because the fund weights its holdings by yield, it tends to favor lower-quality midcaps and value holdings.

Another ETF in this niche, the ProShares S&P 500 Dividend Aristocrats (NOBL), focuses on companies in the index with a 25-year record of dividend increase, but it gives equal weighting to all of its holdings.

It’s important to note that investors looking for income won’t necessarily find the highest yields among this group. Again, the key is consistency, says Weiner. “The point is to find good companies that have demonstrated that they can consistently grow their businesses over time.”

Although Weiner has used passive funds to tap into this group, he thinks active management may have an advantage here. “If something big happens, managers can react faster than an index,” says Weiner, whose firm has invested in the Goldman Sachs Rising Dividend Growth fund.

At the same time the fund sticks with companies that have raised their dividends an average of 10% a year over the last 10 years, its managers look for companies with the wherewithal to continue raising dividends in a meaningful way.

You could put together your own portfolio of dividend aristocrats by using one of the above portfolios as a starting point, but Weiner doesn’t recommend that approach. Even if you did assemble a diverse mix of dividend payers, keeping tabs on these companies is practically a full-time job.

“You can’t just buy and hold, and not pay attention,” says Weiner. “Aristocrats do get overthrown.”

MONEY stocks

These Are Warren Buffett’s Favorite Dividend Stocks

Forbes' 2015 Philanthropy Summit Awards Dinner
Dimitrios Kambouris—Getty Images Warren Buffett speaks during the Forbes' 2015 Philanthropy Summit Awards Dinner on June 3, 2015 in New York City.

The billionaire's own company doesn't pay them out, but it still invests in plenty of other stocks that do.

Warren Buffett loves dividend stocks. While Berkshire Hathaway does not pay any dividends, many of the largest positions in the company’s portfolio are among the most solid dividend stocks on the market, this includes names such as Coca-Cola COCA-COLA COMPANY KO -0.03% , Wells Fargo WELLS FARGO & COMPANY WFC -0.3% , and IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM 0.36% , among several others.

Warren Buffett loves dividend stocks
Going through Berkshire Hathaway’s portfolio, it’s easy to identify many of the most prominent dividend stocks across different sectors in the market. Coca-Cola is one of the most iconic Warren Buffett stocks, and the company has an outstanding track record of dividend growth over the long term: Coca-Cola has increased its dividends in each year over the last 52 years, and the stock pays a dividend yield of 3.3% at current prices.

Wells Fargo is Warren Buffett’s favorite bank, and also the biggest position in Berkshire Hathaway’s portfolio. The company has a simple and low-risk capital allocation policy, which makes it a particularly strong choice for dividend investors looking for sound alternatives in the banking sector.

Wells Fargo had to cut dividends during the financial crisis in 2009, but the company has rapidly compensated investors with growing dividends since then, what was a quarterly payment of $0.05 in 2010 has now turned to 0.375 quarterly, and Wells Fargo is currently paying a 2.7% dividend yield.

Warren Buffett typically stays away from companies in the tech business, but he made a notable exception with IBM. Buffett first invested in Big Blue in 2011, and he has been adding to the position in recent quarters. Due to its brand presence and established relationships with major corporate customers across the world, IBM is a particularly solid play in the tech industry, and management has translated the company’s strengths into growing dividends for investors over the long term.

IBM has paid uninterrupted dividends since 1916, and it has increased payments over the last 20 consecutive years. Dividends have doubled in the last five years, and this includes a generous dividend hike of 18% for 2015. After the latest increase, IBM is paying a dividend yield of 3%.

On dividends and competitive strengths
Dividends can say a lot about the health of a business. In order to distribute consistently growing cash flows to investors, a company has to generate more cash than in needs to reinvest in its operations over time.

This means that companies with outstanding dividend growth are usually those with enough soundness to successfully go through the ups and downs of the business cycle, and they also have the competitive strengths to protect their sales and cash flows from the competition. With this in mind, it’s no wonder why many Warren Buffett stocks are also outstanding dividend payers.

Berkshire Hathaway is a notable exception to the rule, as the company pays no dividends whatsoever. However, this is related to Berkshire’s business model and the amazing investing talent of Warren Buffett. Berkshire is in the business of capital allocation, the company generates far more cash than it needs to reinvest in its operations, but Warren Buffett retains that cash in order to allocate it to different investment opportunities.

For a company like Coca-Cola, or most other businesses in the world for that matter, the right thing to do with excess cash flows is distributing that money to investors. However, investors in Berkshire Hathaway are better served by leaving that money in Buffett’s hands, so the Oracle of Omaha can put it to work and obtain superior returns over time. Berkshire doesn’t pay any dividends, but that’s only because Buffett can put that money to better use, not because the business does not generate enough cash to make dividend distributions.

Dividends convey important information about a company’s fundamental strengths, and Warren Buffett is all about investing in top-quality businesses with undisputed soundness. With this in mind, going for companies with a solid track record of dividend growth could be a smart way to follow Warren Buffett’s guidelines when making investment decisions.

Read next: Warren Buffett Says He Would Never, Ever Do These 3 Things

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MONEY stocks

Millennials Prefer Hot Tech Stocks While Gen Xers Shop for Dividends

Tesla Unveils New Battery System
Kevork Djansezian—Getty Images Elon Musk, CEO of Tesla, with a graphic unveils suite of batteries for homes, businesses, and utilities at the Tesla Design Studio April 30, 2015 in Hawthorne, California.

Among the top picks for young adults aged 34 and younger: Apple, Facebook Inc, Tesla Motors Inc, Alibaba Group Holding Ltd.

It seems America’s youth have found a hero, and he is 84 years old.

For those aged 34 or younger, their No. 2 favorite stock – behind only mighty Apple Inc – is none other than Warren Buffett’s Berkshire Hathaway Inc.

This is according to new data from the brokerage TD Ameritrade, which took a snapshot in May of the individual equity holdings of every one of its retail clients (not including mutual funds and exchange traded funds, which themselves hold baskets of different securities).

When it came to picking individual stocks, the results showed a generational difference. Millennials, who are pegged as tech-obsessed upstarts, favored the stocks of their own time. Aging baby boomers, who are stereotyped as stubbornly set in their ways, and Generation X, which is stuck in the middle, mostly favored what they know best, that is, dividend stocks.

Among the top picks for young adults aged 34 and younger: Apple, which accounts for a whopping 11.7 percent of their equity holdings; Facebook Inc, at 1.9 percent; electric carmaker Tesla Motors Inc (TSLA), at 1.1 percent; and Chinese e-commerce giant Alibaba Group Holding Ltd, at 1.1 percent.

For all those aged 35 years and older, Apple reigns supreme in their portfolios as well, with a share of 9.4 percent. Other popular stocks include General Electric Co, at 1.7 percent; AT&T Inc, at 1.4 percent; and Exxon-Mobil Corp, at 1.4 percent.

No mystery there: Follow the dividend.

“Older clients tend to search for higher yield,” said Nicole Sherrod, TD Ameritrade’s managing director of trading, since dividend-paying stocks provide a steady income stream as boomers start easing into retirement.

“So you see energy companies like Chevron, and healthcare names like Johnson & Johnson, and telecoms like Verizon, all of which they are very familiar with and have been investing in for years.”

For the youngest generation, however, it is all about what is hot now.

“It’s a demographic that is very much into tech, so it’s not shocking that it tends to skew much higher in their portfolios,” said Sherrod.

“Take something like Tesla: It’s something hot that millennials covet, and although they may not have the purchasing power to buy the car yet, they can certainly buy the stock.”

Who Has It Right?

But the underlying question: Do America’s respective generations have their equity mixes right? Or is some rebalancing in order?

To find out, Reuters took the trove of TD Ameritrade data to Patrick O’Shaughnessy, a portfolio manager with Stamford, Connecticut-based O’Shaughnessy Asset Management and author of the book “Millennial Money: How Young Investors Can Build a Fortune.”

His No. 1 concern for both generations: Back off on the Apple, guys. Not because of poor fundamentals, but because of serious overweighting.

“Those Apple percentages are crazy high,” O’Shaughnessy said. “In comparison Apple is around 4 percent of the S&P 500, so that is a huge individual position for both age groups.”

O’Shaughnessy also warns millennials against loading up on the latest sizzling tech stock, say Alibaba, and advises them to look hard at underlying valuations. In many cases price-earnings ratios have shot sky-high, and just do not represent smart buys.

If millennials remain determined to invest in the sector, they should instead look at stodgier tech names like Microsoft Corp, he said. With proven revenue streams, stock buyback programs, and growing dividends, tech’s old guard should prove safer harbor if market storms hit.

O’Shaughnessy’s final tip for investors: Look abroad. Since the U.S. market has “killed every other market for five years,” that likely means many investors are now overweight in American stocks. As a result, bulking up your portfolio with more international names would be wise.

Whether it comes to millennials, or Gen Xers, or boomers, each generation seems to be investing in what it knows. Generally speaking, that is a good thing – and happens to be a favorite principle of Warren Buffett himself.

TIME Money

This Man Just Became Richer Than Warren Buffett

Amancio Ortega and Family Attend CSI Casa Novas Horse Jumping Competition 2013
Xurxo Lobato—Getty Images Amancio Ortega, owner of Zara empire, meets some friends at CSI Casas Novas Horse Jumping Competition 2013 near Arteixo on July 27, 2013 in A Coruna, Spain.

He's a famously private person

Amancio Ortega, founder of clothing retailer Zara, is now the second-richest man in the world, knocking legendary investor Warren Buffett into third place.

The 79-year-old who hails from Spain is worth over $71.5 billion as of June 2, 2015, according to Bloomberg. Bill Gates remains the world’s richest man with a net worth of over $85.5 billion.

Buffet’s net worth of $70.2 billion — over $1 billion shy of Ortega’s new total — drops him well into third.

According to Business Insider:

Ortega founded fast-fashion giant Zara with his then-wife Rosalia in 1975. Today, his retail company Intidex SA — which owns Zara, as well as Massimo Dutti and Pull&Bear — has over 6,600 outposts around the world. Zara in of itself is changing retail forever.

JPMorgan Chase CEO Jamie Dimon recently became a billionaire for the first time as stocks of the company surged. He now has an estimated $1.1 billion net worth.

TIME leadership

This Is How Much It Costs to Lunch With Warren Buffett

150529_INV_Buffett
Rick Wilking—Reuters Berkshire Hathaway CEO Warren Buffett

If it's part of a charity auction that is

For a little more than $1 million, you too could dine with Warren Buffett. The annual auction of a “power lunch” with the Oracle of Omaha opened on Sunday night at $25,000, and the bidding is already up to $1,000,100.

The eBay auction benefits the Glide Foundation, a charitable organization that assists the poor and homeless, which Buffett has chosen to receive the proceeds of the lunch fundraiser each year. Bidding goes until Friday, June 5, at 10:30 p.m. Eastern Daylight Time.

Still, by the time the auction closes, the winning bidder—so far only four are in the race—will likely have to pay much more than $1 million to eat steak with Buffett.

Last year, a Singapore man, Andy Chua, paid $2.2 million for the lunch date, which is often held at the Smith & Wollensky restaurant in New York. The record price for the meal, however, was in 2012, when an anonymous winner paid nearly $3.5 million.

At the current pace of bidding, this year’s auction stands to beat the 2012 record. The bidding was only at $500,000 with two days to go before the close of the auction that year; the current auction has already double that amount and there are still more than four days left to bid.

After all, dining with Buffett has already yielded much more than bragging rights to at least one lucky winner. Ted Weschler outbid his competitors to win the Glide auction in both 2010 and 2011, paying more than $2.6 million each time. Then a hedge fund manager, Weschler spent the meals discussing his own investment strategy and success—and impressed Buffett so much that the Oracle hired Weschler to run part of his legendary investment portfolio at Berkshire Hathaway.

Now considered one of Buffett’s protégés who will eventually take charge of Berkshire’s investments when Buffett eventually retires, Weschler had remained anonymous during both of the Glide auctions. His identity was first revealed by longtime Fortune writer Carol J. Loomis when his hiring was officially announced.

Perhaps it’s Weschler’s kind of prize—the chance to work directly for Buffett—that is inflating the cost of the charity lunch. In 2008, investor Guy Spier paid just $650,000 to lunch with Buffett.

As is typical, Buffett ordered a cherry coke with his medium-rare steak.

MONEY stocks

Give Your Investments a Midyear Checkup

Kagan McLeod

How to ensure your wealth is still in good health.

Halfway into the year, and 2015 may have already thrown you and your financial plans for a loop.

Stocks, which were supposed to slow as the bull market entered its seventh year, are back to setting all-time highs—and have gotten frothy as a result. Gas prices, which were on the verge of plunging below $2 a gallon, have reversed course and are now headed toward $3. And the job market, once on a roll, looks to have hit another speed bump.

Okay, the changes aren’t of the magnitude of what you saw in the financial crisis. But they don’t have to be to throw your financial plans off-kilter. As with your annual physical exam, the midway point of the year is a smart time to take some vitals, run some tests, and reassess your own situation. Over the coming weeks, we’ll provide you with a wealth-care checklist. First up: a review of your investments.

STRESS-TEST YOUR PORTFOLIO

Ailment: Rising rates. The Federal Reserve says it could raise interest rates at any one of its upcoming meetings now—which would mark the first rate increase in nearly nine years.

Hiking rates is like stepping on the economy’s brakes. Historically, there’s an 80% chance stocks will fall by 5% or more once investors see Fed “tightening” as imminent. Moreover, bond prices move in the opposite direction of market rates, so fixed-income funds could take a hit too. When the Fed lifted rates in 1994, for instance, intermediate-term bond prices sank 11.1%.

Treatment: Don’t overreact. The natural inclination is to be überconservative. But market watchers from Warren Buffett to bond guru Bill Gross think global growth is slow enough for the Fed to be patient. And even if the central bank acts in the coming months, short-term rates are still expected to rise only about half a percentage point by year-end, according to a survey of economists by Blue Chip Economic Indicators.

Move to the middle on bonds. The traditional advice for fixed income is to “shorten up.” That is, sell funds holding long-maturity bonds and hide out in short-term debt that’s less vulnerable to price declines. But with short rates still near zero, you could be leaving a lot of money on the table, warns BlackRock portfolio manager Rick Rieder. Plus there’s no guarantee bonds will lose money. When rates rose in 2005, bond prices fell but investors earned 1% on a total return basis when factoring in yields. So instead of going all short, stick with intermediate funds like Dodge & Cox Income DODGE & COX INCOME FUND DODIX 0.15% , whose nearly 3% yield can soften the blow from price declines.

Stay (mostly) the course with stocks. Not all pullbacks turn into bear markets. In fact, history shows most sectors keep rising six months after the Fed starts raising rates, including economically sensitive ones like technology and consumer discretionary, notes S&P Capital IQ’s Sam Stovall. That’s why Stovall says you’re better off holding on and selling equities only if you need to rebalance. In which case…

REBALANCE YOUR INVESTMENT DIET

Ailment: A frothy market. Stocks are still on a roll, with blue-chip equity funds having posted 15% annual gains over the past three years, vs. 3% for intermediate bonds. What’s wrong with that? Based on 10 years of average profits, the price/earnings ratio for stocks is now above 27, where it was leading up to the Great Depression, the 2000 tech wreck, and the 2007 financial crisis. Even if there is selloff here, history says to expect meager returns over the next 10 years.

Treatment: Get back to your target weight. If you started with 60% stocks/40% bonds three years ago, you’re closer to 70% stocks now. Shift your allocation back before the market does it for you, says planner Eric Roberge.

Use the 5% rule: Don’t overmedicate, as rebalancing can trigger trading costs and taxes. So rebalance only if your mix shifted by five percentage points or more, says Francis Kinniry with Vanguard’s investment strategy group.

Think small: Since rebalancing is about selling high, unload your frothiest equities first. Over the past 15 years, small stocks have trounced the S&P 500 by four percentage points annually, and now trade above their historical 3% P/E premium to bluechip shares.

Sell American: In the past decade, U.S. stocks have outpaced foreign equities by 3.5 points a year. American shares now trade at a 15% higher P/E ratio than global stocks, even though they have historically traded at similar valuations.

MONEY stocks

Here’s the Company Warren Buffett Is Betting Big on Now

150529_INV_Buffett
Rick Wilking—Reuters Berkshire Hathaway CEO Warren Buffett

He just dropped nearly $400 million on this bank stock.

“Too much of a good thing can be wonderful.”
–Mae West

Warren Buffett must feel that way about megabank Wells Fargo WELLS FARGO & COMPANY WFC -0.3% . At the end of 2014, Berkshire Hathaway held more than 463 million shares of the company, worth $25.4 billion. Berkshire’s stake in Wells Fargo was the largest holding in its portfolio by a country mile: It constituted about 24% of Berkshire’s portfolio and was worth $8.5 billion more than the second-largest holding, Coca-Cola.

And it seems Berkshire loves Wells as much as ever: In the most recently ended quarter, Buffett — or Berkshire portfolio managers Ted Weschler and Todd Combs — bought another 6.8 million shares, worth more than $382 million at recent market prices.

Why is Buffett willing to commit so much of Berkshire’s wealth to this company? Let’s take a closer look.

Sticking with what you’re good at
Buffett has more than proven his investing and business prowess in the insurance and banking industries. These are businesses in which having a margin of safety is incredibly important.

In banking, as we learned through the economic crisis and the liquidity crunch that followed, banks that effectively manage their risk — like Wells Fargo — can be fantastic long-term investments. For Buffett to risk such a large stake on this one bank says a lot about his comfort with Wells Fargo’s management team and their ability both to manage the bank’s risk and to make profitable lending decisions.

Here’s a look at Wells Fargo’s bottom-line results, as many of its megabank peers were struggling in the 2007-2009 banking crisis:

Screen Shot 2015-05-29 at 11.50.27 AM

Wells Fargo continued to deliver solid profits while other banks suffered massive losses. True, Wells did receive $25 billion in funds from the U.S. federal government in 2008, but by December 2009 the company had paid back that $25 billion — plus an additional $1.4 billion in dividends — making it one of the first banks to demonstrate its stability in the wake of the financial crisis.

But what it really boils down to is this: How good is the bank at turning profits on its assets? Wells Fargo is almost peerless in the world of U.S.-based big banks:

Screen Shot 2015-05-29 at 11.51.28 AM

Meanwhile, its ability to grow earnings per share has been unparalleled:

Screen Shot 2015-05-29 at 11.52.19 AM

Berkshire is not risking too much capital

Average investors should not generally hold a quarter of their portfolio in a single stock, but a few things bear pointing out:

  • A concentrated portfolio can be profitable if you’re disciplined and patient and really know the companies and industries you invest in.
  • The Berkshire portfolio will continue to grow for decades to come as Buffett, Combs, and Weschler continue buying more great stocks.
  • The value of Berkshire Hathaway’s operating businesses need to be factored in, too.
Screen Shot 2015-05-29 at 11.53.36 AM

The Berkshire stock portfolio is only part of the profit-producing machine that is Berkshire Hathaway. Think about it this way: Berkshire has a market capitalization of around $356 billion, while the stock portfolio is worth $107 billion and change.

In this context, Wells Fargo only makes up about 7% of Berkshire’s market value.

Is Wells Fargo right for your portfolio?
Wells Fargo is one of the best-run banks on the market. It pays a dividend yielding a respectable 2.7% at recent prices, and along with JPMorgan Chase, it’s one of the few big banks that pay a higher dividend today than they did before the recession. Furthermore, that dividend is likely to grow over time as the company grows its earnings. The bank has increased its dividend every year since 2011 and will raise it 7% in 2015. As CEO John Stumpf said on the recent earnings call, “returning capital to shareholders remains a priority” for management.

Since the beginning of the financial crisis and recession, Wells has issued a lot of shares, adding more than 50% to the outstanding share count. This was a product of necessity: A significant portion of the capital raised was used to meet higher liquidity standards for banks. But it was also used opportunistically to grow — take for example the stock-funded, $14.8 billion acquisition of Wachovia in 2008. Since mid-2013, however, Wells management has repurchased more than 140 million shares, reducing the outstanding count by almost 3%.

Add it all up, and Wells Fargo is one of the best-run banks of any size, with as strong a long-term track record of earnings growth (and loss avoidance) as you’ll find. I’ll let Warren Buffett sum it up in this quote (emphasis mine):

When assets are 20 times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the “institutional imperative”: the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.

Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a “cheap” price. Instead, our only interest is in buying into well-managed banks at fair prices. With Wells Fargo, we think we have obtained the best managers in the business.

Those words sound especially relevant following the financial crisis, right? Well, Buffett wrote them in 1990. A quarter-century later, plenty of bankers still make bad decisions, while Wells continues to avoid the pitfalls. Does that mean it’s a good fit for your your portfolio? I’d say it’s worth a close look.

Jason Hall owns shares of Berkshire Hathaway and Wells Fargo. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Wells Fargo. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, Citigroup Inc, JPMorgan Chase, and Wells Fargo.

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TIME Economy

Warren Buffett: $15 Minimum Wage Will Crush the Working Class

Warren Buffett And BofA CEO Brian Moynihan Speak At Georgetown University
Drew Angerer/Getty Images

The billionaire has a surprising position on beloved issue for the left

Warren Buffett is a favorite of the American left for his support of such policies as higher taxes on the rich and healthcare reform.

But advocates for workers rights may be a little less pleased with the billionaire investor after he published an op-ed in The Wall Street Journal Friday, decrying the efforts in many cities across the United States to raise the minimum wage to as much as $15 per hour.

Buffett admitted that the middle class has increasingly hurt by an economy that rewards people with “specialized talents,” but not the vast majority of Americans who hold “more commonplace skills.” However, Buffett argues that trying to solve the problem of stagnant wages for working Americans by raising the minimum wage is misguided. Writes Buffett:

In my mind, the country’s economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity.

That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.

Instead, Buffett says, we should expand the earned income tax credit, also known as a “negative income tax,” in which the government subsidizes the wages of workers making under a certain amount. “The EITC rewards work and provides an incentive for workers to improve their skills,” Buffett writes. “Equally important, it does not distort market forces, thereby maximizing employment.”

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