In 1973, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) held its first annual meeting in the cafeteria of one of its subsidiaries and attracted several dozen people. Earlier this month, nearly 40,000 people made the trek to Omaha, Nebraska, for Berkshire’s annual meeting, where they could listen to billionaire CEO Warren Buffett talk about his company, the U.S. economy and his investment philosophy.
Since taking the reins at Berkshire Hathaway in the mid-1960s, Buffett has overseen returns of more than 5,050,000% on his company’s Class A (BRK.A) shares. This absolutely crushes the total return of about 34,700%, including dividends, for the broad base S&P500 over the same route.
Warren Buffett and his team secretly built a position in Berkshire’s $378 billion portfolio
Investors pay close attention to what the “Oracle of Omaha” says because mirroring his investments has been a money-making strategy for decades. Fortunately, there’s an easy way to follow in Buffett’s footsteps.
May 15 marked the deadline for institutional investors and money managers with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission (SEC). A 13F provides a snapshot of what Wall Street’s smartest and most successful asset managers bought and sold in the most recent quarter. Considering that Buffett oversees a $378 billion investment portfolio at Berkshire, he and his team are absolutely required to file a 13F with the SEC.
However, Berkshire’s previous two 13F filings (for the quarters ending in September and December) contained a clause granting the company “confidential treatment” for one or more of its securities. This is a fancy way of saying that Warren Buffett and his team asked for and received permission not to disclose the one or more stocks in which they were building a position.
The reason for this secrecy is simple: both professional and casual investors tend to flock to the stocks that the Oracle of Omaha and his team buy. Keeping this stock mysterious would give Buffett and his team the opportunity to build a stake at a reasonably lower share price.
That stock is no longer a mystery, even if it isn’t the biggest surprise of Berkshire Hathaway’s 13F.
Warren Buffett’s ‘confidential treatment’ stock is revealed
A few months ago, I pieced together the clues about this “confidential” stock using data from Berkshire Hathaway’s operating results and Buffett’s historical investing activities. I was able to narrow these mystery candidates down to seven stocks, but ultimately landed on the wrong one.
Despite selling stakes in other insurers, such as Globe life And Markel Groupthe mystery stock of which Berkshire has acquired more than 25.9 million shares since mid-2023 (with a market value of $7.1 billion at the time of writing), is a Swiss-based property and casualty (P&C) insurer. Chubb (NYSE: CB).
Warren Buffett and his team know a thing or two about property and casualty insurers. Berkshire Hathaway owns GEICO, one of the nation’s largest property insurance companies. GEICO also happens to be one of Buffett’s biggest investments of all time.
While the insurance industry can rightly be described as ‘boring’, buying a 6.4% stake in Chubb is right up Warren Buffett’s alley.
Although catastrophe losses are an unavoidable part of being an insurer, the general insurance industry generally has exceptionally high pricing power. If an event occurs that results in higher payouts, insurers can justify increasing premiums for their customers. But if payouts are normal or below average, insurers still have the power to increase premiums, with the justification that they are preparing for the next inevitable loss event.
Insurance companies also benefit from the Federal Reserve’s aggressive monetary policy. While bringing in more revenue than is paid out in claims is the main goal for insurers, they also generate interest income on their float – the revenue they take in that is not paid out in claims. The fastest pace of rate hikes in four decades has pushed short-term government bond yields to around 5%. As long as prevailing inflation remains above the Fed’s long-term target, insurers will benefit from additional interest income.
And of course, there’s Chubb’s excellent capital return program. Last week, the company announced it would increase its annual base payout for the 31st year in a row.
Furthermore, Chubb’s board also authorized a new $5 billion stock buyback program in June 2023, shortly before Warren Buffett and his team began buying shares. Steadily reducing Chubb’s share count will incrementally increase Berkshire Hathaway’s ownership stake in the company.
This is considerably more surprising than Buffett building a stake in Chubb
However, removing the cloak of Berkshire’s growing stake in Chubb wasn’t the most surprising takeaway from Berkshire Hathaway’s 13F filing with the SEC for the quarter ended in March. Rather, it’s the reacceleration we’ve seen in Warren Buffett and his team’s sales activities, including a notable reduction in the company’s stake in Apple.
Even counting the position the Oracle of Omaha and his team have built in Chubb, Berkshire’s brightest minds have been net sellers of stocks for six straight quarters. Here’s how net sales activity has evolved since October 1, 2022:
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Fourth quarter of 2022: $14.64 billion in net stock sales.
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First quarter of 2023: $10.41 billion in net stock sales.
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Second quarter of 2023: $7.981 billion in net stock sales.
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Third quarter of 2023: $5.253 billion in net stock sales.
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Fourth quarter of 2023: $0.525 billion in net equity sales.
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First quarter of 2024: $17.281 billion in net stock sales.
In total, Buffett and his top investment advisors, Ted Weschler and Todd Combs, sold $56.09 billion more in stocks than they bought in an 18-month timeline.
While Warren Buffett is a long-term investor who will always bet on America’s success, it’s clear that he and his investment team aren’t finding much value on Wall Street right now. This can be confirmed by taking a closer look at the Shiller price-to-earnings ratio of the S&P 500, which is at one of the highest values ​​during a bull market rally in history, when it was retested back to 1871.
Buffett also noted at his company’s annual shareholder meeting that Berkshire’s cash pile, which includes U.S. Treasuries, could reach a record high of $200 billion in the current quarter. This indicates that additional sales are expected.
Until the stock market experiences a significant pullback, we may not see much buying activity from the Oracle of Omaha – and that’s something the investment community is definitely not used to.
Should you invest $1,000 in Chubb now?
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apple, Berkshire Hathaway, and Markel Group. The Motley Fool has a disclosure policy.
Warren Buffett’s Mystery Stock Has Been Revealed, But This Is the Much Bigger Surprise was originally published by The Motley Fool
