Warren Buffett Investing Strategy. Berkshire Monopoly

Warren Buffett Investing Strategy could be seen in Berkshire Portfolio
Mapping Berkshire Portfolio

Many resources – whether it is Reddit thread, YouTube video, or blog – often quoted what Warren Buffett says and what he writes. Unfortunately, only a few (including us) give a deep analysis of Oracle’s portfolio. We believe, looking carefully at his portfolio, investors could understand more about Warren Buffett Investing Strategy.

Our Thought

Regarding Warren Buffett’s portfolio, some said about business with earning power. Some focus on the economic moat. Nothing wrong. But as usual, we try to be different. We focus on the overlooked aspects. One of the most favorable characteristics of Warren Buffett’s investment: Monopoly.

In This Issue

Where We’re Looking At
Understanding Warren Buffett Investing Strategy by Looking at Complete Business.

Many investors will quickly say Apple, Bank of America, and American Express when talking about Warren Buffett’s investments. Not wrong. But, paying attention too much to this will make us miss another important picture.

Some of you may already know, Berkshire Hathaway, Warren Buffett’s vehicle for investment, has classified its revenue into two legs of segments. The marketable securities and the companies under its umbrella. Marketable securities are – in plain English – stocks. These are Apple, Amazon, Amex (American Express), BofA (Bank of America). Investors often overlook the other legs: companies under the Berkshire umbrella.

This article will invite you to see the whole picture, not only marketable securities, not only the subsidiaries. But as one big picture: Berkshire Hathaway. Berkshire portfolio is where we are looking at.

The Transporter Pack
Warren Buffett Investing Strategy is Monopoly in Transportation.

Our first attention goes to the transportation group. They are Burlington Northern Santa Fe (BNSF) and United Parcel Services (UPS). Berkshire owns an entire BNSF as a subsidiary and holds 59,400 shares of UPS.

Both BNSF and UPS share the same monopolistic natures. BNSF altogether with Union Pacific Railroad dominate transcontinental freight rail lines in the Western part of the United States. While UPS, with FedEx, controls the small parcel industry. So Warren has BNSF for bulk, large – both in size and numbers – delivery, and has UPS for smaller ones.

Patience and Passion

Warren Buffett’s ambition in transportation isn’t one-off. It is a long vision and patience execution. There is a ten years gap between the BNSF acquisition (2009) and UPS investment (2019).

Economic Moat: Unrivaled Intermodal

We give you these statistics to describe how strong is BNSF’s economic moat: 32,000 miles of network, 6,700 locomotives, and super-efficient machine that could carry a ton of goods as far as 470 miles just by consuming one gallon of diesel. For Americans, coal carried by BNSF locomotive power up 25% of US electricity.

For UPS, imagine these numbers: 1,000 U.S. and 800 international operating facilities that are connected by 127,000 vehicles including 58,000 containers, and 588 aircraft.

The Trident Magic Card
Warren Buffett Investing Strategy is Focus on Card Payment

With regard to percent of purchase volume, trio Visa – Mastercard – American Express (Amex) leave only 4% market share for Deliver. It is surely total domination. Warren Buffett’s favorites are American Express with 151,610,700 shares, followed by Visa (9,562,460 shares) and MasterCard (4,288,648 shares).

Interestingly, we find similarities between the Card group and the Transportation group. Both of them serve as carriers or intermediate parties that connect something to another. The transporter pack connects one place to another, moving the goods while the Card Network connects the buyer to the merchant, or merchant to merchant, moving the money.

Investor Corner, Network Effect

Buffett likes to see the connection as a durable business advantage. The wider, the better – the more it connected, the stronger its network effect. And talking about connection, we remember Buffett’s love-hate relationship with airlines’ monopoly (before selling them in 2020). This brings us back to transportation once again.

Warren Buffett ever invested in the airlines’ quartet —American, Delta, United, and Southwest—a group that controls more than 80 percent of US traffic. Interestingly, unlike the Pepsi versus Coca-Cola battle (Buffett also invests here), the oligopolies of this fantastic four bring awful services for customers. Complaint about airlines is common things in today’s life.

Mad-Eye Moody’s
Warren Buffett Investing Strategy is Focus on Company That Set Standard.

It is not Alastor Moodys the Auror. What Moody’s does is assess the credit of certain companies through its deep research. For instance, Moody’s downgraded the Tesla credit rating from B2 to B3 in 2018. The closer it is to an A rating, the more possible it pays the debt.

Altogether with SP500, Moody’s are the power that dominates 90% control of the Credit Rating Agency industry. So it makes money just by assigning a score for a certain company? Yes. Why do companies need to be rated by Moody’s? Because they need money. Moody rate their creditworthiness – their capability to pay the debt.

The origin of this power is rather unknown for us, it just simply happens. Moody and SP500’s long reputation (more than a century) have set standards for credit rating.

Investor Corner, Intangible

You rarely change your standard. So this is the economic moat. The intangible asset.

Big Tech Member: Amazon and Apple
Tech With Monopoly

When comes to the techs, Buffett still keeps its monopolistic mindset. Apple and Amazon represent it. As you all know, Amazon is the leader of e-commerce in the US. To describe its monopolistic power, you need to consider these: Amazon dominates more than 83% market share for books, music, video, and more than 50% of computer/electronics sales.

It is a little tricky for Apple. The iPhone global market share seems minuscule (only 14%) compared to Xiao Mi and Samsung. But in the US, Apple conquers about 45% market share.

Several Points on Monopoly
Get Closer with Warren Buffett Investing Strategy

Lets recap here

  1. We are read about economic moat, franchise business model, value investing, but one sure thing that represents Buffett’s portfolio: It is a monopoly.
  2. But investors don’t need to conclude that it is all about monopoly. We are sure that Warren Buffett has another prerequisite to picking a certain company as his investment. If it is only about monopoly, Facebook and Google will be Berkshire portfolios. But it doesn’t. We encourage investors to also follow this approach. Monopoly business is a great investment, but you need another filter.
  3. Connecting the pattern seems that Warren Buffett tying his portfolio with… American. Amazon and Apple are monopolies here, so do BNSF, UPS, Airlines quartet. America itself is a monopoly by its nature. Dollar as reserve currency and the status as largest economy in the world. So Buffett is investing in monopoly in the monopoly.
  4. It is interesting to note that Charlie Munger – Warren’s partner – also invest in Alibaba. It seems that the Berkshire gang try to invest in a duo e-commerce giant in the two largest economies in the world.