2 Things I Learnt From Berkshire Hathaway Annual Report

Trying to find ideas for my next investment, I looked at Berkshire Hathaway’s annual report for 2014. Although the initial intend was to see what Warren Buffett invest in and copy, what I learnt from reading the annual report was far more than what I expected. Of all the things I learnt, two things struck me the most.

Investor Monkey - Book of Investment

While trying to find out what I could invest in for my next month’s investment, I decided to turn to Warren Buffett for advice.

Nope, I do not know him personally. To understand how he managed to turn his company, Berkshire Hathaway, into a company that is worth billions of dollars, I took a look at the annual report of Berkshire Hathaway for 2014.

Looking at the annual report was indeed insightful like the thoughts for some investments that was made. What I have learnt from reading the annual report was about focusing with diversification and exiting when required to.

Focusing With Diversification

Warren Buffett did not explicitly talk about focusing and diversifying in the annual report. This was something that I have derived from the top 15 shares that Berkshire Hathaway had with the largest market value in 2014.

A long debated topic about whether to focus or diversify your portfolio. I have been through this as well when I was thinking through for my new portfolio – should I focus on investing in one company or should I spread the invested amount to a basket of shares?

The conclusion was to diversify to reduce the risk that the portfolio suffers if price of the single invested company falls.

Then the next question arises – should I rebalance the portfolio so that the net market value for each company is equal (or close to equal)?

I did not have any answer for that and decided that since the monthly investment is small, it would not make sense to think about it till I have my portfolio filled with a diversified set of companies.

However looking at the list of top 15 shares that Berkshire Hathaway owns lead me to one conclusion. We should have a portfolio that is diversified in many industries but focused on strong companies within the portfolio by owning more shares of these companies.

If we look at the top 15 shares carefully, we can see that the cost of the top 15 shares are not of the same cost with some costing much more than the others. As such, I derived that Warren Buffett does not attempt to rebalance Berkshire Hathaway’s portfolio and thus I should also not rebalance my portfolio.

Stock Code Cost (million)
AXX $1,287
KXX $1,299
DXX $843
DXX $1,253
DXX $1,454
GXX $750
IXX $13,157
MXX $248
MXX $2,990
PXX $336
SXX $1,721
UXX $3,033
UXX $836
WXX $3,798
WXX $11,871

Exiting When Required To

When deriving a strategy for the new portfolio, another question that pops into my mind was when should I exit. I was debating to myself that companies that I would have selected for the portfolio should be fundamentally strong to brave the financial storms in years to come and thus I should keep the stocks forever.

However I also know that times change. The products and services offered by companies today might be well-received by the masses today might not be true for tomorrow. There are many cases for such in our everyday life, e.g. Konica – film product manufacturer who lost to new technology (digital cameras) and Nokia – handphone manufacturer who lost to their competitor.

Warren Buffett did mention in the annual report that he had a big mistake by dawdling in the sale of Tesco (reasons please read the annual report).

An important point to draw is that we have to be very clear the intentions in investing the company that we choose and if the reasons are no longer valid or there is no solution(s) to the changes, we have to exit and look for better investments elsewhere.

The Bottom Line

Important lessons can be learnt from reading the annual report of Berkshire Hathaway as Warren Buffett will put in personal comments on why certain decisions were made. This undoubtedly gives us some insights on how Warren Buffett chooses the next company to invest in and reasons to why he decides to close some of his positions which we might overlook.

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