Berkshire Hathaway CEO Warren Buffett
Most stories on Buffett’s purchase of Exxon Mobil shares are missing the most important point.
If you don’t already know, Buffett’s Berkshire Hathaway recently made public its $3.7 billion stake in Exxon Mobil Corp. The revelation pushed Exxon’s price up, but perhaps markets shouldn’t care so much about what Warren Buffett is buying these days.
You see, Buffett’s investment in Exxon, like his recent investment in IBM, is more a sign of his lack of options than a vote of confidence in these big blue chips. That’s the paradox of investment success, once you’ve been successful for as long as Buffett has, you are such a big player that your portfolio inevitably begins to look like an index fund. You simply can’t invest in small or mid-size stocks without either taking control, or making them a miniscule portion of your portfolio.
So where is Berkshire Hathaway supposed to sink $3.7 billion without taking ownership of a company? Let’s assume that Buffett wants to make an investment in an American company, without becoming an insider (so less than 10% of the company, for a $3.7 billion investment that means a market cap less than $37 billion), doesn’t want to pay more than 20 times earnings, and expects at least a yield of 1.5%. That narrows his options to only 112 companies (according to Google’s stock screener).
Even that number is a stretch because Buffett rarely takes a 10% stake in companies he doesn’t plan on controlling. His investment in Exxon was less than 1% of market cap, and his first announced investment in IBM was 5.5%. With the amount of money Buffett uses to make investments, his universe of possible targets is extremely limited.
Are we saying you shouldn’t invest in Exxon? No, we’re not giving advice on any stock here. But remember that Buffett’s success has made him less nimble than you. Perhaps the best investment for Warren Buffett may not be the right one for an individual investor nearing or in retirement.
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