The Warren Buffett Guide to Making Money

I once went to a Berkshire Hathaway annual meeting. I met a guy who told me how in 1976 he bought 200 shares. “After a year the stock had doubled so I decided to take some profits off the table. I sold 100 shares and started a restaurant and ran that for the next 30 years,” he said. “Made a decent living.”

“The other 100 shares I did nothing with at all. Now it’s worth over $12 million.”

I admit it. I was jealous. I wanted to be him.

After that I got ahold of Warren Buffett’s letters. Not his Berkshire letters, which were available to the public. But his hedge fund letters, which at the time were private. Maybe they are public now. I have no idea.

I studied each one. Then I wrote a book, “Trade Like Warren Buffett” because when he was running his hedge fund in the 50s and 60s he was a much more active trader than he is now. Much more nimble.

Warren Buffett doesn’t look at P/E ratios. He’s not a value investor in the classic sense. He bets on demographic trends. The most important investing quote he’s ever said is, “If a company will be here in 20 years then it is probably a good investment now.” This is not always true. He said, “probably.”

So what companies will probably be here in 20 years? I have no clue. Nor does he. But I will bet on the companies that are returning cash to shareholders.

(Related: The so-safe-it’s-boring investment that has averaged a 12.5% return in the past 7 years… Learn more here.)

As Mark Cuban told me the other day, “a company is only worth the money you get back from it.”

(he still lives in this house. I had a cab driver drive me passed it).
(He still lives in this house. I had a cab driver drive me past it).

So let’s look at the companies Warren Buffett (or his team) added to or removed from the portfolio this quarter.

AAPL (Apple)

This one came as a surprise to a lot of people. Buffett has long said that he doesn’t like to invest in technology companies because he only invests in industries that he understands — “I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz,” he once wrote.

But his managers at Berkshire Hathaway overruled the boss this time and bought 9.8 million shares in Apple in early 2016, taking advantage of the company’s extremely depressed stock price.

The holding represents 0.83% of Berkshire’s total portfolio and 0.18% of Apple’s outstanding shares. A company with a cash hoard like Apple’s, a 2+% dividend yeild and with Buffett invested? Yes, please.

PSX (Phillips 66)

If you believe, as I do (and Warren Buffett does) that the US is going to be a bigger exporter of oil than Saudi Arabia than the marketing and refining of that oil is key.

Buffett added to his PSX position again, this time by 23% to 5.1% of the company, which has been raising dividends since 2002 and now yields over  2.3%.

PG (Procter & Gamble)

As recently as 2014, PG was among Buffett’s largest holdings, worth more than $4 billion and accounting for roughly 2% of the company’s outstanding shares. But that’s over now. This year Berkshire cut its exposure to Procter & Gamble by 99%, to just $25 million, by unloading more than 52 million shares. PG’s dividend yield is currently over 3%.


IBM’s stock price keeps going down, and Buffett keeps averaging his cost basis in the holding lower and lower. He’s added about 200,000 shares this year to take his total holding – in a stock that’s currently yielding almost 3.8% – to 81.2 million shares.

Ok, that’s the basic idea.

My rule of thumb is to always invest behind people who are smarter than me. Warren Buffett is smarter than me.

One anecdote from the meeting. Someone asked Charlie Munger and Warren Buffett what was going to happen to the US dollar.

Munger, who barely spoke the entire meeting, said, “you better start burying all your valuables in your back y-”

And that’s when Buffett interrupted him with a stern, “Charlie!”

I don’t know what’s going to happen to the US dollar. Or any of these stocks. Or my relationship with my wife. Or my relationships with my kids. One time a doctor told me we all have cancer cells, we just don’t see them all the time.

OK, all of this is good to know. But I do think Buffett knows more about all of this than I do. And if I filter his knowledge with the basic fact that it’s good for companies to pay me cash every day, and if I filter that with demographic trends, and if I throw in an added filter that these companies have been raising their dividends for years, and on top of that I say, am I diversified, then I know that I will build an OK portfolio.

And if Warren Buffett is picking all the stocks for me for free (he is my unpaid intern after all), then I’m pretty confident that this is a good start.

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