Last Thursday Warren Buffett, chairman and CEO of Berkshire Hathaway, reported his third quarter portfolio update. He, or one of his hired fund managers Todd Combs or Ted Weschler, reported holding a new stock position in the third quarter: Exxon Mobil Corporation. The size of the position suggests that it is a Buffett position.
Berkshire reported owning Exxon Mobil in the third quarter in an amended filing, but actually first bought the stock in the second quarter without filing, and hid the fact until now. In the second quarter he bought 31,244,110 shares. In the third, it added 8,845,261. The average share prices for the two quarters were both $90.
As always when I hear such an announcement I rush to my model price charts to see what is happening and for a quick analysis. I didn’t have to for Exxon Mobil, this model price chart is well known to me and Buffet’s purchase makes all the sense in the world.
If you want to be a successful investor in real estate the cliché is “Location, Location, Location”. To emulate Warren Buffett in the equity markets you have to know Valuation, Valuation, Valuation (and tax-free compounding). The business press will always tell you who, what, when and the where. I will disclose the why and the how! Let’s have a look at Warren’s playbook.
First, let me show you our super long-term model price chart from our database for Exxon Mobil.
Exxon Mobil with monthly price bars, EBV Lines (colored lines) and model price (dashed line)
As you can see our model price chart goes back to 1995, some 18 years. I have annotated by ‘up’ arrows only two other times – 1995 and 2010 – that Exxon Mobil traded at the same EBV level that Mr. Buffett made his most recent purchase of XOM (EBV+3).
One of America’s largest and best-managed public companies is trading at a valuation only seen twice before over the last 18 years. Mr. Buffett used this valuation level to purchase a sizable stake in the company. This is why Mr. Buffett is one of the wealthiest men in the world. The market is, for whatever reason, placing a valuation on Exxon Mobil that rarely occurs. First, Mr. Buffett recognizes this fact and has the investment capital to take advantage of the situation.
Another secret of Warren’s that rarely ever gets any coverage is the man rarely, if ever, sells his main positions. Warren has two things working for him when making an investment, the first is the valuation level of his purchase and the second is tax free compounding as the book value of the company goes up over time – as you can see in our model price chart in that our EBV (parallel multi-colored lines) slope upward on a logarithmic scale. Another bonus is Exxon Mobil pays a dividend of 2.64% in line with 10 year US treasuries.
To summarize, Warren’s has some cash lying around. One of the best-managed companies in the world, a company that can trace its roots to John D. Rockefeller, is trading at a valuation that’s only occurred twice before in the last 18 years. Plus as an added bonus Exxon pays out a yield of 2.64% – same yield one receives on US Treasury bonds. (In ten years the US Treasury gives you your money back, one can only speculate what the value of Warren’s shareholding of XOM would be and the future yield the company would be paying.)
This is how the rich get richer my friends!