Building a portfolio philosophy

Warren Buffett’s elephant gun finally went off last week. While the news that Berkshire Hathaway had completed one of the biggest deals in its illustrious history was probably lost for many among the terrible scenes coming out of Japan, Buffett watchers shouldn’t ignore the significance of his $9.7 billion takeover of Ohio-based lubricants maker Lubrizol Corp.

Buffett made it clear in his annual shareholders letter that he was “itching” to make a big acquisition and even hinted that a few potential deals had failed to proceed in recent months.

But with more than $30 billion to spend, Buffett wasn’t going to wait long. And like his last big acquisition – 2009’s $34 billion deal to snare railway company Burlington National – the purchase of Lubrizol plays to Buffett’s investment theme: that global trade is bouncing back.

The way Buffett is building Berkshire’s portfolio around a central investment theme is not unusual. Indeed, billionaire investors including Carlos Slim, John Paulson and George Soros also appear to have adopted a specific philosophy and are building their portfolios around it.

Warren Buffett

Buffett’s acquisition of Lubrizol, which manufactures lubricants for engines in large trucks, buses and boats and also makes chemical products used in hair, skin and home care products, is a typical Berkshire deal.

It is a simple company with a simple business model and an easy-to-understand product. It’s also got a strong management team in place, or strong enough that Buffett isn’t making changes.

It’s also relatively cheap, according to some analysis by Bloomberg, which argues that Buffett has grabbed Lubrizol for 5.8 times EBIDTA, jut higher than the 5.7 times it was trading at back in October 2008, just a month after Lehman Brothers went down as Buffett told everyone to start buying US equities.

More tellingly, the deal should be seen as a natural follow-on to his Burlington National acquisition.

Basically, Buffett is betting that as the US and global economies recover, global trade will recover. More ships, trucks and trains will be needed to move goods and people around, and Burlington National and Lubrizol will benefit.

Buffett said the Burlington National deal was an “all-in wager on the economic future of the United States”. He’s just added to his bet.

Carlos Slim

Carlos Slim made his investment philosophy very clear in early February when he announced he would invest $8.3 billion into Latin American countries this year.

About $3.66 billion will be spent in his home country of Mexico, more than 40% of which will go into the telecom and broadband sector. He will also pump money into roads, mines, water treatment and a “digital university”.

Another $2.5 billion would be invested in telecoms in Brazil, while Colombia, Peru, Chile and Argentina are also on his hit list.

While Slim clearly knows these regions well, his investments are a sign of the continued emergence of Latin America as a wealth centre. According to Forbes, the number of billionaires in Brazil jumped by two-thirds to 30 last year.

And if you’re worried about investing in places like Latin America due to sovereign risks, Slim’s got a message for you.

“Things happen all around the world. Look at the international sections of newspapers, there’s violence and those things. It’s more worrying to see developed countries with serious fiscal difficulties, enormous unemployment, and they’re employing measures which are merely palliative,” he told a news conference in February.

“Whoever doesn’t invest for any reason, out of fear, precaution or whatever, will stay behind.”

John Paulson

Not enough has been made of John Paulson’s amazing 12 months, in which his hedge fund made $5 billion and his personal fortune climbed $4 billion to $16 billion. This amazing effort came just three years after he made $3.5 billion in 12 months by shorting sub-prime stocks.

Paulson, who manages $36 billion worth of assets, appears to following a number of investment themes in his portfolio, the top 20 stock in which can be seen and analysed here <https://seekingalpha.com/article/254152-john-paulson-s-20-largest-holdings-and-recent-performance> .

There’s a theme around financial services, with substantial holdings in Wells Fargo, Suntrust, Citigroup, Hartford Financial Services and Bank of America, although Paulson has been selling shares in the latter over the last few quarters.

There’s also a theme around health, with holdings such as Pfizer, drug maker Mylan Laboratories, and biotechnology company Genzyme Corporation, shares in which have jumped 67% in the last nine months.

However, Paulson’s really big bet is on gold-related assets (including exchange-traded funds and individual gold stocks such as Angolgold Ashanti), which account for more than a third of his total holdings and shot up in value by 30% last year.

Actually, this isn’t so much a bet on gold as it is a bet on rising inflation, which Paulson believes will be at double-digit levels by 2012. Indeed, he’s so sure interest rates will need to soar to counter rising inflation that he advised listeners at a speech in New York last September to wade into the stricken US housing market.

“Your debt and interest payments get locked in at record lows, while the price of your home will rise,” he told his audience.

“If you don’t own a home buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

Not sure if we’ll follow that advice John, but we certainly get your point.

George Soros

Tracking the themes inside the portfolio of veteran investor George Soros is a bit harder, mainly because there more than 830 stocks in the portfolio of his Quantum fund, many of which are actively traded. You’ll find tech companies (Apple and Cisco), retailers (WalMart and Home Depot) and even car companies (Ford and General Motors).

Like Paulson, Soros is also a noted gold bug and an investor in gold-related exchange traded funds. But his big focus of late – or at least the one he talks about a lot – is clean tech.

Two weeks ago, Soros’ Quantum fund invested alongside a fund set up by former US Secretary of State Madeleine Albright and poured $250 million into APR Energy, a company that mainly supplies temporary power in developing countries. Soros and Albright will have a controlling stake in company.