Investors in Berkshire Hathaway (BRK.A) are anxious to know if Warren Buffett's hand-picked successors, Todd Combs and Ted Weschler, can deliver anything close to the legendary investor's performance once they fully inherit the keys to the enormous holding company. Buffett gave Berkshire investors a bit of a confidence boost recently in his annual letter when he said that Combs and Weschler "left me in the dust" with their recent stock picks.
Buffett also claimed that most of the holding company's new stock picks over the last couple years were picked by his successors. We can't know for sure which of Berkshire's recent picks can be attributed to Buffett and which to "Todd and Ted." But our guess is that the larger buys are more likely to be Buffett's own ideas.
Let's look at Berkshire's new positions since the end of 2010, positions it owned as of its most recent 13F, and see how those that are currently between $100 million and $750 million in size (excluding spinouts such as Mondelez International (MDLZ), Phillips 66 (PSX) and Liberty Media (LMCA)) compare with those that are larger:
This leaves us with 14 stocks, three of which we attribute to Buffett and 11 of which we believe more likely to belong to Todd and Ted (though some of them may be smaller positions from Buffett). The three positions that are currently larger than $750 million are actually all larger than $1.5 billion, and they are currently among Berkshire's top 10 picks. Assuming that the holding company started buying at the beginning of the quarter in which it later reported initiating a position: IBM (IBM) is up 14% since July 2011, underperforming the S&P 500; DirecTV (DTV) is up 10% since July 2011, also underperforming; and DaVita HealthCare Partners (DVA) is up 90% since October 2011, crushing the market.
We turn now to the stocks Berkshire has bought in the last two years and owned as holdings between $100 million and $750 million as of the end of December. Eleven stocks are in this category:
- Archer Daniels Midland (ADM)
- Verisign (VRSN)
- Deere (DE)
- Precision Castparts (PCP)
- WABCO (WBC)
- National Oilwell Varco (NOV)
- General Motors (GM)
- Viacom (VIA)
- General Dynamics (GD)
- Visa (V)
- MasterCard (MA)
The first thing we notice is that the median performance of these stocks since Berkshire started buying them has actually not been that good: Six have beaten the S&P 500, and five have underperformed the index. However, some of the wins have been much bigger than the losses. (Note that the same is the case with the three stocks we discussed earlier and assigned to Buffett. Only DaVita has outperformed, but it did so strongly enough to offset IBM and DirecTV's losses relative to the market.)
The credit card stocks stand out in particular, as both Visa and MasterCard are up at least 90%. As a result, the average stock in this category has indeed outperformed the S&P 500, by 17 percentage points. If we exclude Visa and MasterCard, then the average stock has underperformed by 1%. If we also exclude the two biggest losers in this sub-portfolio, National Oilwell Varco and General Dynamics, we get average outperformance of 6%. That's not bad, but it's clear that outperformance has been due to the fact that the biggest wins have been larger than the biggest losses.
Of course, this is a small sample size -- particularly so when you consider Berkshire's larger stock positions -- and we certainly wouldn't call it representative of what investors in the holding company can expect. This analysis also does not count stocks which Berkshire initially bought at some point in the last couple years but does not own anymore.
And as we said, we can't be certain that the smaller positions do actually belong to Combs and Weschler, although Buffett did of course comment that "most" of the new picks are theirs, and certainly by picking Visa and MasterCard, they would have indeed left him in the dust. As a result, we'd conclude that Combs and Weschler are showing a similar profile of returns to Buffett, in that they do not necessarily have a high "batting average" with their recent picks, but they deliver outperformance by racking up bigger wins than losses.