Buffett, Simpson and a mountain of Berkshire investments

February 26, 2011: 7:55 AM ET

Buffett changed the portfolio in interesting ways while retiring colleague Simpson went on a selling spree.

Warren Buffett and Lou Simpson

Warren Buffett and Lou Simpson

By Carol Loomis, senior editor-at-large

Berkshire Hathaway's (BRK.A),(BRK.B) stock portfolio—recently more than $60 billion in size—underwent some pronounced changes in 2010, but a clutch of them definitely weren't the work of Warren Buffett.

The other mover and shaker at Berkshire was Lou Simpson, who ran GEICO's investments for more than 30 years and then told Buffett last summer than he wanted to retire at yearend. That set Simpson—"one of the investment greats," says Buffett—to closing down the positions he held at GEICO.

So holdings of such companies as Carmax (KMX), Iron Mountain (IRM), Nalco (NLC), and NRG Energy (NRG) disappeared in the last half of 2010. Not that these had ever been listed in Buffett's annual letter to shareholders, where only very large positions (over $1 billion in recent annual reports) have been described.

Simpson's positions were subsumed in the "others" category at the bottom of Buffett's annual table of holdings.  And it is interesting to see that the "others" total—Simpson would be the main reason here—dropped from $8.6 billion at yearend 2009 to $5 billion at yearend 2010.

The only detailed evidence of Simpson's positions appeared in the quarterly 13F filings that Berkshire makes with the SEC.  And there it didn't say, "Look, these are Simpson's!"

Instead, a sleuth had to peer at certain numbers that disclosed what Berkshire subsidiaries were doing the buying. If GEICO's numbers were there—and if the size of the positions was relatively small in comparison to the billions that Buffett deals in—you were into Simpson territory.

In addition to those Simpson holdings named above, another that disappeared in late 2010 was five million shares of Bank of America (BAC).

The B of A holding became a story line for some journalists, who jumped to compare its elimination with purchases of Wells Fargo (WFC) that Buffett himself had made during 2010.

You can't say this story line had much substance:  Not only were the investment managers different, but so were the amounts. Simpson's B of A holding was worth under $100 million, whereas Buffett forked over more than $1 billion in 2010 to build Berkshire's long-standing Wells Fargo position.

By yearend, Berkshire owned 359 million shares of Wells worth $11.1 billion, against a cost of $8 billion.  That yearend value made Wells Berkshire's second-most-valuable holding, after Coca-Cola (KO), at $13.1 billion. Berkshire's cost on Coke is $1.3 billion.

Buffett's annual letter to shareholders, released today, speaks of the Coke holding, in a section describing dividend increases that he thinks will be materializing and helping out Berkshire's returns.  He notes that in 1995, the first year after Berkshire finished buying its 200 million shares of Coke stock, the company paid Berkshire $88 million of dividends. In every year since, Coke has raised its dividend—and Berkshire is expecting to get a $376 million payment from it in 2011. Buffett is also looking forward to step-ups from that in the future.

Beyond Buffett's continuing to accumulate Wells Fargo stock for Berkshire, significant changes in its equity list included sizeable  reductions in its blocks of Conoco (COP) and Kraft (KFT).

Neither cut was a particular surprise: Buffett had previously said he erred in buying Conoco at a peak price for oil (though now, of course, the commodity's rising price is putting a different cast on the investment) and he had publicly protested Kraft's 2010 purchase of Cadbury, which he thought not in the interests of Kraft's shareholders. (Since Kraft agreed to buy Cadbury early last year, Kraft stock has risen about 11%, to $32 per share).

Another reduction, though the relatively small size of Berkshire's holdings makes the sales discernible only in the 13F filings, is that Berkshire cut its investment in Moody's (MCO) from about 32 million shares at the end of 2009 to 28.4 million a year later. This holding, which Buffett had begun to sell down in 2008, has earned him lots of criticism because of Moody's controversial role in the financial crisis. In 2010, it also got him a subpoena to appear at a Financial Crisis Inquiry Commission hearing.

On the buying front, one continuing drama was Buffett's  increasing Berkshire's holdings in Johnson &  Johnson (JNJ) during the year from about 28.5 million shares to 45 million shares.  Buffett had said in his 2009 annual letter that he had sold some J & J  (and other stocks as well) to raise money for Berkshire's investments in Swiss Re and Dow (DOW), and also the company's purchase of Burlington Northern.

But he also said he expected J & J to sell higher in the future, and his recent purchases suggest he's backing that proposition. It also couldn't have hurt that J & J stock was a dog during 2010, getting nowhere in the face of never-ending quality control problems.  Buffett's usual style (though it certainly wasn't visible with Conoco) is to buy a stock when it's out of favor, and that pretty much describes J & J's current position.

One other Berkshire purchase in 2010—Munich Re--deserves mention for one unusual reason: Buffett personally bought 100,000 shares of that stock while Berkshire was loading up with more than 19 million shares and making itself a 10% owner of Munich.  Buffett doesn't normally telegraph what he's doing with his personal cash, but he abandoned that practice here.

As 2011 proceeds, the big mystery in Berkshire's stock holdings will be what the company's newly-hired investment manager, Todd Combs, has contributed to them. Like Lou Simpson, he will be managing $1 billion to $3 billion of Berkshire's money. But unlike Simpson, he won't be managing GEICO's funds. So sleuths inspecting the 13F filings will have a more difficult time figuring out what Combs has bought, since his purchase could be plunked into any Berkshire subsidiary that has funds to invest (GEICO included).

But once again, the purchases that will stand out as possibly Combs-made are those of small size. Buffett hasn't gone in for small packages in several decades.

The writer of this article, FORTUNE senior editor-at-large Carol Loomis, is a friend of Warren Buffett's and a Berkshire shareholder. She has been the pro bono editor of his annual chairman's letter for more than 30 years.

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