Stuart Shaw, CFA

Investment ideas are all around us. We come in contact with many companies every day, and the media can give us idea overload. Another source to tap into is a great investor. Probably the greatest investor of our time is Warren Buffett who runs Berkshire Hathaway.

Warren Buffet’s accomplishments as an investor and businessman are legendary. Buffett’s amazing story began in 1962 when he started investing in Berkshire Hathaway, a textile company of which he ultimately gained control. In 1967 Berkshire ventured into insurance with the purchase of National Indemnity and National Fire and Marine for $8.6 million. GEICO was brought on board in the late 1970’s. Today, Berkshire Hathaway is a major force in auto insurance and reinsurance, owns 73 companies, and Buffett is among the three richest men in the world.

These performance measurements further demonstrate Buffett’s management acumen. Berkshire’s book value per share grew at a compounded annual rate of 21.4% in the period from 1965 to 2006, as compared with 10.4% for the S&P 500 (with dividends). Pretax earnings per share expanded at a compounded annual rate of 17.9% from 1965 to 2006. Investments per share went from $4 in 1965 to $80,636 in 2006, a compound growth rate of 27.5%.

Buffett is someone we want to get to know. Well, maybe we can’t personally, but we can access Berkshire’s shareholder documents (annual and interim reports and SEC filings) at www.berkshirehathaway.com, and it’s free.

Buffett and his long time partner Charlie Munger tell us their criteria for acquiring companies in the 2006 annual report. Among these criteria are three that give us direct insight into their investing philosophy: “(1) Demonstrated consistent earning power (future projections are of no interest to us, nor are turnaround situations); (2) Businesses earning good returns on equity while employing little or no debt; (3) Simple businesses (if there’s lots of technology, we won’t understand it. “

We can find a list of Berkshire’s stock holdings also in the 2006 annual report. The list is comprised of 17 individual holdings with a market value of more than $700 million. Including $8.3 billion of stocks not itemized, the total common stock portfolio had a market value of $61.5 billion at the end of 2006.

The financial services industry stands out. American Express (AXP), M&T Bank (MTB), Moody’s (MCO), US Bancorp (USB), Wells Fargo (WFC) and White Mountains Insurance (WTM) together accounted for 38% of the portfolio. That property and casualty insurance is also Berkshire’s core business makes financial services a clear favorite of Buffett’s.

Not far behind financial services are leading brand name consumer products companies: Anheuser – Busch (BUD), Coca – Cola (K), Johnson & Johnson (JNJ), Procter & Gamble (PG) and Wal – Mart (WMT). Comprising 33% of the portfolio, these companies dominate their markets and provide products that people need and use every day.

Buffett apparently likes the long-term prospects for the building industry. Berkshire owns several building related companies spanning manufactured housing, carpeting, paint, face brick, roof truces, insulation, and real estate brokerage. USG Corp. (USG), a manufacturer of gypsum building products, is held in the stock portfolio.

Energy is another investment theme that we can glean from the portfolio and owned companies. The stocks: Conoco Phillips (COP) and PetroChina (PTR). Berkshire also has an 81% interest in MidAmerican Energy Holdings, which owns electric utilities in the U.S. and U.K., and pipelines that transport 8% of the natural gas consumed in the U.S.

Just recently Berkshire reported that it made a $3 billion investment for an 11% stake in Burlington Northern Santa Fe (BNI), one of the country’s major railroads. Berkshire also stated that it has acquired smaller stakes in two other North American railroads. Could this be another way that Buffett is playing the energy theme? The railroads are a more energy efficient way to transport goods, such as ethanol.

Great investors are an invaluable source of investment themes and stock ideas. Nevertheless, always do your own research before you invest.

By the way, I own shares in Berkshire Hathaway so that Buffett can manage some of my money.