This is the eighth year-end portfolio review I've written for GuruFocus. It's an article I look forward to every year because of the feedback I get from readers and fellow investors. As always, I hope you reach out and become a friend as we continue to learn and improve together. With that, here's the usual disclaimers: first, you shouldn't invest in any of the companies discussed here without doing your own research / analysis; and second, I have no idea how these stocks will perform over the next week, month or year - but I surely wouldn't mind if they traded significantly lower and presented an opportunity to invest additional capital at more attractive prices. I aim to be a net buyer of stocks for decades, and many of the companies that I'm invested in will spend billions on share repurchases over the coming years, so I hope we can both buy additional shares as cheaply as possible.
As well all know, 2019 was a great year for equity investors. After a difficult end to 2018, including a peak to trough drawdown of roughly 20% in the fourth quarter, the good ol' market prognosticators were chomping at the bit. Was it finally time for this bull market to end? With the benefit of hindsight, we now know that it was another stellar year for equities. Yet again, those market participants that spend their days trying to jump in and out of the market have paid a dear price for their impatience.
I was relatively inactive this year, largely due to the fact that I continue to struggle to find businesses that I believe are misunderstood and trading at a material discount to intrinsic value. In all honesty, the lack of new ideas has discouraged me a bit, and has made it hard to keep turning over new rocks (I also think I've been adversely affected by this constantly connected world, which feels like it has wilted my ability to think deeply and focus my attention). I'm not too sure how to get that spark back, outside of waiting for a market correction or getting away from the Twitter fire hose. I'll be trying some different approaches in the New Year, and may discuss this in more detail down the road (maybe some readers are going through a similar lull).
With that, let's talk stocks. The numbers discussed below are as a percentage of my equity portfolio (as opposed to measuring them as a percentage of my overall investment portfolio). I will discuss my top five largest positions, which collectively account for 65% of the total equity portfolio.
Berkshire Hathaway Inc. (BRK.B) (15% of equity portfolio) - I write about Berkshire frequently, so review my other articles if you want more details on why this has been and will continue to be a large holding. I think the valuation remains reasonable, particularly relative to the other opportunities I see today. Over the long run, I expect the stock to deliver adequate returns with a limited chance of adverse outcomes. If the world becomes less accommodating, I would expect Berkshire to be able to effectively use its fortress balance sheet to allocate tens of billions of dollars towards acquisitions, share repurchases, and publicly-traded securities. That's the kind of optionality I'm quite fond of. No matter what the future brings, I remain very comfortable with a sizable position in Berkshire.
Wells Fargo (WFC) (14% of equity portfolio) β Wells Fargo was an addition to the top five in 2018, with the thesis based on the combination of a high-quality business, an attractive valuation, significant capital returns and an eventual return to normal operations for the bank. While it's still early, and the company continues to face headwinds in the current interest rate environment, I'm encouraged by the developments of the past year. Repurchases have had a material impact on the per share results, and I'm optimistic that CEO Charlie Scharf is the right guy for the job. In addition, it seems that the board of directors fully appreciates the company's need to address lingering issues expeditiously. The timing for all of this remains uncertain, but things are heading in the right direction.
Based on my math, Wells trades at a single digit forward price-earnings ratio if you're willing to look out a few years. That just doesn't make much sense to me in today's world. With the stock at current levels, I hope management will continue to commit a significant percentage of capital to repurchases. That's a long way of saying that I think the story remains largely unchanged. If you're willing to own WFC for the long run, I think there's a good chance you'll be happy with the outcome.
Microsoft (MSFT) (14% of equity portfolio) β Microsoft, like Berkshire, has been a top holding for as long as I've been doing these year-end reviews. 2019 was another stellar year for Microsoft's business. Commercial cloud run rate revenues will soon cross $50 billion, or roughly three times higher than they were at the end of fiscal 2017 (amazingly, still growing ~40% year over year). Despite widespread fears in the media that an internal hire would be the death of the company, Satya Nadella continues to prove that he is exactly the right person to lead Microsoft.
As I noted last year, I do not think the stock is particularly cheap. On the other hand, this is a wonderful business with a best-in-class leadership team. I think the bias of most value investors in this situation (myself included) is to head for the exits prematurely. I am not sure that's the correct course of action, particularly if that means incurring a significant tax liability. I like the idea of being Satya's business partner for the long-term, even if I'm not in love with what I'm being asked to pay for that privilege. For that reason, I feel comfortable continuing to hold a sizable position in MSFT.
The Walt Disney Company (DIS) (12% of equity portfolio) β Disney is a new addition to the top five, resulting from my prior investment in 21st Century Fox (I elected shares as part of the deal). I actually do not believe that my perception of the current situation at Disney is particularly different from what others are seeing. What I do believe is that Bog Iger is a world class CEO who knows how to run Disney. If anybody can navigate the difficult terrain required to reposition this "dinosaur" for the future, it's him (and they've already made meaningful steps in the right direction over the past few years). In addition, the company has a collection of intellectual property that remains unrivaled, as well as a business model that enables them to effectively monetize that content through multiple channels. For those reasons, I continue to like the idea of owning Disney over the coming years.
Comcast (CMCSA) (10% of equity portfolio) β As I noted last year, I think Comcast is a well-run, high-quality business with sustainable competitive advantages in its core business. In addition, I'm willing to give management a longer leash on M&A than others (or at least that's my perception). I think they've earned that right based on the track record they've established over twenty-plus years. At a mid-teens free cash flow multiple, I still believe that the stock trades at a discount to intrinsic value. That's a long way of saying that I believe the same things about this company at $45 per share that I believed last year at $35 per share.
Conclusion
All in, my pretax investment return for 2019, including transaction costs, was an increase of roughly 25%. That's certainly better than what I expected on an absolute basis, even though it trailed the S&P 500 by a few hundred basis points. Considering how I structure my portfolio and the kind of companies I own, that feels to me like an acceptable result in a runaway year for the market.
Expanding the time horizon, my portfolio has returned ~13% p.a. over the past five years, slightly better than to the index. I'll be frank: I do not find this particularly encouraging. I've added little value relative to what I could've achieved if I bought an index fund and spent the last five years at the beach (and that includes the tailwind from a large position in Microsoft, which certaintly included a fair bit of luck on my part). Whether or not I have the requisite abilities to succeed at this game is still up in the air. Or maybe I just need more realistic expectations (beating by 100 - 200 basis points over an investment lifetime is hardly immaterial). We'll see what happens to my returns when (if?) we encounter a sustained period where Mr. Market is less generous to equity investors. I think that would be beneficial to my relative results, but only time will tell.
I don't have any idea what Mr. Market has in store for us in 2020, but I'd be happy if we see some volatility and lower stock prices. That scenario would like present us with some compelling long-term investment opportunities. As always, I look forward to the thoughts of fellow investors.
Disclosure: Long BRK.B, WFC, MSFT, DIS and CMCSA
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