To The Moon

The 2022 Berkshire Hathaway annual meeting is around the corner! Let's review Warren Buffett's top 10 investments, and try to learn his stock philosophy through real investment cases.

$BYD COMPANY(01211)$ : The first love of technology stocks

Initial investment date: 2008

Liquidation date: Still holding

Annualized Rate of Return: 25% (Note: Dividends are excluded in the calculation)

Data as of 2018

For Berkshire Hathaway, investments in $BYD COMPANY(01211)$ is a drop in the ocean; its 225 million shares-$6.75 billion- in BYD represent only 2% of Berkshire's investments in the secondary market.

The initial investment in BYD actually came from his good partner, Charlie Munger. It said that Munger has met BYD's leader Wang Chuanfu and praised him for his competency.

Therefore, Buffett, claiming to not invest in tech stocks, put his money firstly to $BYD COMPANY(01211)$ rather than $Apple(AAPL)$ and $IBM(IBM)$ .

In September 2008, with the collapse of Lehman Brothers and the financial crisis, the new energy concept plunged. In this conjuncture, Berkshire bought 2 .25 billion shares of $BYD COMPANY(01211)$ at $1.03 (8 HKD). His cost was about $232 million.

Just one year later, BYD's stock surged to HK$88, realizing an 11x gain in one year.

However, as the global economy sank further, BYD's profits plunged 94% in 2012. The stock price quickly fell to the initial cost.

Some people thought that Buffett's investment in BYD was wrong, and said that he had invested in an industry and company that had no competitive advantage. These people clearly viewed BYD as a traditional car-making company.

Yet Buffett was confident in the managers and kept holding it. BYD's strong stock performance has made it a long-term leader in new energy sector in China.

$Freddie Mac(FMCC)$ :The Perfect Exit of the Omaha Prophet

Initial investment date: 1988

Liquidation date: 2000

Annualized Rate of Return: 23%

Warren Buffett often says: "For good companies, I want to hold them forever." Buy-and-Hold is also Berkshire's most talked-about investment strategy. Warren Buffett's signature investments have been long-term holdings. Investments in $Coca-Cola(KO)$ originated in 1988 and $Wells Fargo(WFC)$ in 1990.

But not all investments in Berkshire are held forever. Only the one who sells at the top can be deemed as master. Buffett's investment in Freddie Mac is a good example.

At the end of the 1980s, Warren Buffett bought Freddie Mac shares at an average price of $4 (after the stock split), accounting for about 9% of its total share capital. Buffeett's reason was that he thought the price of FMCC was "ridiculously cheap"; of course, he was proven to be so right. By 1998, Berkshire's investment in Freddie Mac had doubled 12x.

By 2000, $Freddie Mac(FMCC)$ 's performance was almost at its peak. Simply by looking at the performance, few people could sell at that time.

But Buffett saw signs of anomalies in $Freddie Mac(FMCC)$ . For example, the management constantly pursued high risks; focused too much on the short-term performance; and company made risky investments.

These signs led Buffett to liquidate almost all of $Freddie Mac(FMCC)$ 's stock around 2000.

As we all know from the following story, the subprime mortgage crisis pushed $Freddie Mac(FMCC)$ to the very edge of bankruptcy. It's worth noting that Buffett's cautious judgment came from his reading of the company's earnings.

The Washington Post: The Story of a Paperboy

Initial investment date: 1973

Liquidation date (equity swap): 2014

Annualized Rate of Return: 12%

Investment in newspapers is Warren Buffett's interests, who had an early experience as a paperboy. When he first met Katherine Graham, head of the Washington Post in 1971, Buffett, who already owned a large stake in The New Yorker, still felt it was too late to know the Washington Post.

Buffett favored the profitability model of the newspaper or economic goodwill. He believed that the capital investment of newspapers were low, and good operations could be converted into profitability very quickly. In the 1970s, the Washington Post's return on equity (ROE) reached 30%. 

This investment showed Warren Buffett's preference for good management. His investment in the Washington Post was largely credited to Katherine Graham's personal management competency.

In 2014, Berkshire signed a $1.1 billion equity swap agreement with Graham Holdings, exiting its equity investment in it. At a cost of $11 million, Buffett gained a 100x gain(dividens were not included) over four decades.

$Bank of America(BAC)$ : Be Fearful When Others Are Greedy

Initial investment date: 2011

Liquidate date (equity swap): Still holding

Annualized rate of return: 24%

Data as of 2018

Contrarian thinking in investing is Warren Buffett's signature style. The famous saying: "Be greedy when others are fearful" can explain his features. But it's hard to trade in this way. And on the investment in Bank of America, Warren Buffett made a good demonstration.

In 2011, when the financial industry was out of control, Buffett decided to take a stake in Bank of America.

• Berkshire purchased $5 billion worth of Bank of America's preferred stock, receiving a fixed annual dividend of 6%.

• Berkshire received subscription warrants to buy 700 million shares of Bank of America's common stock at $7.14 until 2021.

Buffett's purchase of $Bank of America(BAC)$ was to "catch a falling knife."

"Be greedy when others are fearful" comes from Buffett; and the unsaid part was that "greed" should be achieved in a proper way.

Bank of America was not only want Buffett's money but also needed his name to calm down the market sentiment. The average person cannot get a good offer as Buffett. That's why retail investors can hardly bottom out successfully. 

Even without dividends, Buffett has earned $16 billion on Bank of America.

$PetroChina(PTR)$ : The Secret of Picking a Stock

Initial investment date: 2002

Liquidation date: 2007

Annualized Rate of Return: 50%

Between 2002 and 2003, Berkshire spent $488 million to buy a 1.3% stake in $PetroChina(PTR)$ . With the oil price risingsharply, PetroChina's market value rose to $275 billion, a 7x increase in five years.

Many people will be curious, how exactly did the old man find these treasures?

In the case of $PetroChina(PTR)$ , Warren Buffett said his stock selection was not restricted to specific national or geographic circles. As long as he can read the company's earnings, business model, and accounting statements, he will include it in his stock selection pool.

He claimed that he accidentally read PetroChina's earnings that year, which happened to be in English.

So Warren Buffett's secret of picking stocks is to read earnings.

Of course not everyone approves of Warren Buffett's stock selection method. At a Berkshire shareholders meeting in 2008, Buffett was questioned about his lack of due diligence. Someone asked, "With such a large investment, all you've done is read the annual report. Don't you want to do more research?"

Buffett replied, "I have never asked for a third-party opinion on my investment in $PetroChina(PTR)$ . I read the results and thought PetroChina was worth at least $100 billion. Then I checked the stock price and found that it was only $35 billion. With such big differences, it is not necessary to do too much analysis. If I know a person weighs 300 pounds or more, then I don't need an exact number to know he's fat."

The case of the investment in $PetroChina(PTR)$ reflected his ability to:

1. think and make decisions independently
2. do reverse engineering.

He did research to evaluate the company first and then looked at the stock price. If you look the stock price first, you will have a preconceived bias that can easily affect the objectivity of the decision.

Of course can the average person also rely solely on earnings information to make decisions? I am not sure. Warren Buffett's decision making is based on his extensive experience.

That's all about top 5 investments of Buffeet. 

Follow me and learn Buffett's story tomorrow!

Share what you learn from Buffett's investment in the comment section~~