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        Fundamental Analysis

        Views 9662022.11.09

        What can we learn from Warren Buffett's portfolio?


        By studying Warren Buffett's portfolio we can have some implications on his success:

        Concentrated investments are critical to achieving market-beating returns

        High portfolio turnover is a wealth destructor

        Rebalancing can be irrational

        In the last section, we introduced some of Mr. Buffett's key principles in investing.

        In this section, we will go over his portfolio so we can better understand how he applied these principles in practice.


        Check out the most updated portfolio of Warren Buffett

        Buffett's holding company, $Berkshire Hathaway Inc.(BRK.A.US)$, submitted 13F filings submitted on Monday.

        The top five investments in Berkshire Hathaway


        Source: Whalewisdom

        Top Buys and Top Sells

        According to a 13F filing, Buffett took a fresh position with 3.7 million shares in $Pfizer Inc(PFE.US)$, which soared last week.

        He also bought 21.2 million shares of $AbbVie Inc(ABBV.US)$, 22.4 million shares of $Merck & Co Inc(MRK.US)$, and about 30 million shares of $Bristol-Myers Squibb Co(BMY.US)$.

        Meanwhile, he continued to shed bank stocks like $JPMorgan Chase & Co(JPM.US)$and $Wells Fargo & Co(WFC.US)$, while exiting $Costco Wholesale Corp(COST.US)$.


        Source: Whalewisdom

        What are the implications?

        Focus investing

        Warren Buffett's stake in Top 5 holdings is 77.94%.The largest holding $Apple Inc(AAPL.US)$is 47.87%.

        Warren Buffett once stated that "Diversification is protection against ignorance. It makes little sense if you know what you are doing.

        In his view, studying one or two industries in great depth, learning their ins and outs, and using that knowledge to profit from those industries is more lucrative than spreading a portfolio across a broad array of sectors so that gains from certain sectors offset losses from others.

        Key takeaway: Concentrated investments are critical to achieving market-beating returns.

        Long-term investing low turnover ratio

        When we look at Berkshire's Top Buys and Top Sells in the quarter, these changes are actually modest, compare to the whole portfolio. According to Whalewisdom, Warren's portfolio merely shows a turnover ratio of 14.29%.

        Excessive trading in and out of positions in an attempt to anticipate market price changes is not the Buffett way. Buffett's famous baseball analogy is a great way to mentally grasp this concept. 

        For Buffett, investing is a series of pitches and to achieve above-average performance one must wait until an opportunity arrives in the sweet 「strike」 zone. He believes investors too often swing at bad pitches, and their performance consequently suffers.

        Key takeaway: High portfolio turnover is a wealth destructor.

        Rebalancing can be irrational

        A human tendency is a desire for order, for balance, for unity, for symmetry.

        This concept is the reason why the majority of portfolio management strategies are based on what is called rebalancing.

        Whenever a holding becomes proportionally larger than a portfolio's other holdings, the portfolio manager sells a fraction of the holding to 「lock in gains」and brings it down to a pre-determined target weighting.

        In the first quarter, Warren Buffett's stake in $Apple Inc(AAPL.US)$was 35.52%, increased from 29.74%last quarter due to the strong market performance. His stake in Apple is now close to 50%, due to further stock rally. 

        What if Warren Buffett rebalanced his portfolio? He would've profited less.

        What often actually happens in the stock market and business is that industry economics and sustainable competitive advantages result in certain market-beating companies continuing to over-perform and poor companies continuing to drift.

        Warren Buffett: 「You would not sell off Michael Jordan just because he has gotten so important to the team.」

        Source: Junto Investment

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