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Charlie Munger: Berkshire Hathaway's Turnover Has Been 'Way Too Much'

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- By Rupert Hargreaves

At the beginning of March this year, I wrote an article looking at the buying and selling activity in Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) giant equity portfolio during 2020.

According to the conglomerate's 10-K report, it purchased $30.2 billion worth of equity securities throughout the financial year ending Dec. 31 2020. Meanwhile, it sold $38.8 billion of equity securities. Berkshire also acquired $208 billion worth of U.S. Treasury Bills and fixed maturity securities last year.


I thought this was interesting because Warren Buffett (Trades, Portfolio) has consistently promoted the idea that investors should buy securities to hold them forever. However, selling such a large amount of stock throughout the year suggested that the Oracle of Omaha had an unusually high turnover rate in 2020.

It seemed that Buffett had been more active than usual for the past few years. In 2019, Berkshire acquired $18.6 billion of equity securities and sold $14.4 billion. In 2018, the group spent $43.2 billion buying equity securities and received $18.8 billion from sales.

Higher level of turnover

Last weekend, at Berkshire's annual meeting, one investor asked Buffett if his buy-and-hold philosophy had changed considering the "greater turnover in the equity portfolio lately."

Buffett initially started his response with a simple statement, declaring, "I don't think there's that much turnover." His right-hand man, Charlie Munger (Trades, Portfolio), clearly disagreed. He said, "There's way too much."

Even though Buffett had initially said that he didn't believe there was too much turnover in the portfolio, he agreed with Munger's statement. The CEO of Berkshire added:


"Yeah, I'd agree with that. And the truth is our businesses are equities, so we own 400 or 500 billion, maybe more, in businesses. We don't turn them over at all. We don't resell businesses. Well, we won't even get into that, what we could do, but we don't do it. And we do relatively little, but as Charlie says we'd do better if I had done less."



This statement is not entirely correct. Berkshire does resell businesses. Earlier in 2020, for example, the group sold its newspaper business for $140 million in cash. The deal included organizations such as the Omaha World-Herald in Nebraska and the Tulsa World in Oklahoma.

At the beginning of 2019, the conglomerate also disposed of its Applied Underwriters workers compensation unit. Applied Underwriters provides bundled workers compensation and other employment-related insurance products targeted to small and medium-sized businesses.

Granted, these sales are few and far between, and they probably made much sense because they are organizations where Berkshire does not have the size and scale the compete effectively. However, they debunk the myth that the group never sells.

Takeaways

So what should investors take away from all of this? Well, it's clear Buffett is not always in it for the long-term, despite that being the ideal he wants to stick to. However, what the Oracle of Omaha is exceptionally good at is holding onto good businesses and selling those that are no longer performing as expected.

This is one of his best qualities, and it's something many other investors struggle with. Buffett never sells good businesses (apart from the occasional mistake such as selling shares of Apple (NASDAQ:AAPL) last year, but that's a different conversation). Instead, he sells businesses when he believes the investment case has changed or he can find a better opportunity elsewhere.

This is incredibly important because holding onto stocks where the investment case has changed can seriously harm one's financial health. It's not illegal to sell stocks. In some cases, the opportunity cost of not doing so is huge.

This is something Buffett knows all too well. So, while he often touts the benefits of buy and hold investing, he is also aware that sometimes it is better to sell and move on.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.