There are many good reasons to pay attention to every investment decision made by Warren Buffett.
In addition to being chairman and CEO of the eighth-largest publicly traded company in the world, Buffett also has an impressive track record as an investor. Since taking control Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) In 1965, he increased the value of the company, including its investments, by a compound annual growth rate of 19.8%. In comparison, the total return is 10.2% S&P 500 index during this time. Anyone who invested in Berkshire instead of an average S&P 500 fund would have 140 times their assets today.
In recent years, Buffett has had great difficulty finding a great company to buy. The bigger Berkshire Hathaway gets, the more cash flows out of its operations, and Buffett has watched the company’s cash pile grow faster than he can find good investments. Its largest investment last year totaled $9.2 billion, while the company ended the year with $167.6 billion.
It’s a good bet that Buffett will continue to purchase shares of the company this year as he believes the company is undervalued in today’s market.
Buffett’s largest investment last year
As mentioned above, Buffett hasn’t seen much good in the stock market over the past year, so his new investments have been paltry.
One stock he has continually added to in 2023 and continues to buy in 2024 is Occidental Petroleum (NYSE:OXY). The company has a strong position in the Permian Basin and access to some of the lowest cost oil sources in the country. Berkshire Hathaway first invested in Occidental in 2019 with the purchase of $10 billion in preferred shares to support the oil company’s purchase of Anadarko. Since then, Buffett has taken a massive 28% stake in the company through his common stock, more than offsetting Occidental’s withdrawal of its preferred stock last year. Still, Buffett’s Occidental purchases in 2023 only amounted to about $3 billion.
There is also another company in which Buffett acquired a significant stake last year. However, we still don’t know exactly what it is. While Berkshire Hathaway is typically required to disclose every position in its portfolio at the end of each quarter, the company received a special exemption from the SEC for the final two quarters of 2023. Therefore, we don’t know exactly what Buffett bought.
But we have some clues. First, the company appears to be a financial stock based on Berkshire Hathaway’s reported cost basis for “banking, insurance and finance” stocks. Second, Berkshire’s financial disclosures suggest that the company has invested over $5 billion in the stock in 2023. This means the company must be very large, considering Berkshire is required to disclose the company after acquiring a 5% stake in the company. My colleague Sean Williams used his best guess to narrow the field down to just seven potential candidates Mitsubishi UFJ Financial Group. Since Berkshire has asked to keep the position confidential, investors can bet that it plans further purchases in 2024.
Still, these two investments pale in comparison to the amount Buffett spent on his biggest purchase of 2023. Buffett spent $9.2 billion buying shares of one of his favorite stocks. His first purchase of shares in the company occurred in 1962. Yes, Buffett’s largest stock purchase for Berkshire Hathaway shareholders last year was Berkshire Hathaway shares themselves!
Buffett’s buyback philosophy
Berkshire Hathaway’s board previously limited Buffett’s ability to buy back shares based on the stock’s price-to-book ratio. If the ratio exceeds 1.2, Buffett would not be able to buy back shares of Berkshire Hathaway, no matter how much he feels the market is undervaluing the stock.
In mid-2018, the board agreed to allow Buffett to buy shares of Berkshire Hathaway as long as both he and the late vice chairman Charlie Munger agreed that the stock’s price was below its intrinsic value based on a conservative estimate.
Since Munger’s death, Buffett has been the sole factor determining the stock’s intrinsic value. But investors shouldn’t worry about him wielding too much power. Buffett insists that management should never overpay to buy back his shares. In his most recent letter to shareholders he made it clear: “All Share buybacks should be price-dependent. What makes sense at a discount to the business value becomes stupid when it is done at a premium.”
Additionally, Buffett holds about 99% of his wealth in Berkshire Hathaway stocks, and he has many family members who own a significant portion of their wealth in Berkshire stocks. He only sells shares if he donates them to charity. His interests couldn’t be more aligned with those of the rest of Berkshire’s shareholders.
Still, Buffett has bought back shares of Berkshire Hathaway every quarter since the board approved the change. This includes $9.2 billion last year.
Considering that Berkshire Hathaway generates strong operating results from its wholly owned companies and generates billions of dollars in free cash flow each quarter, it is very likely that Buffett will continue to buy stocks in 2024. Berkshire Hathaway shares currently trade at just 17.5 times forward earnings estimates. This is well below the S&P 500’s expected P/E ratio of 20.8. And when you take into account the cash on the balance sheet, this ratio looks even more attractive.
Therefore, it would be more than justified for Buffett to continue buying back Berkshire Hathaway shares. We’ll find out whether Buffett bought more stocks in the first three months of the year on Saturday, when Berkshire Hathaway releases its quarterly report. And if you’re interested in a growing share of a company that Buffett believes is undervalued, you might consider adding some of the stock to your own portfolio.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett bought $9.2 billion of this stock last year, and he could buy even more in 2024, originally published by The Motley Fool