Buffett’s Mystery Holding Unveiled: How To Play It

view original post

Speculation has been rife for some time about why Berkshire Hathaway requested special exemption from disclosure of a holding that most likely it has been building a position in.

Buffett knows as well as anyone that his holdings are carefully observed and many followers plough into them with abandon when revealed.

He also has admitted that so few purchases will move the needle for Berkshire now that it’s like trying to find a needle in a haystack. On a related note, he was asked how he would generate 50% a year if he held a small portfolio and disclosed his answer would be enormous research into small-cap stocks.

Portfolios as large as Berkshire’s or even those with $10 billion and more under management will struggle to beat the market in his view. But the retail investor still has a chance.

But back to his mystery position. The fact that he seems to have spotted a rare play likely prompted him or his investment team to request the exemption. Until his position is built, the revelation won’t be shared with the rest of the market. However, the unveiling may well happen today. If so, what’s the best way to play it?

Key Points

  • Berkshire Hathaway’s recent secretive move has sparked speculation about an undisclosed investment by Buffett, who acknowledges the difficulty of finding impactful investments for the conglomerate.
  • Despite the mystery, clues suggest Buffett’s preferences, hinting at major banks as potential contenders due to their large market caps and low P/E ratios.
  • Retail investors can choose between direct investment in the speculated stock or adopting a diversified approach inspired by Buffett’s tactics, including options trading to gain exposure to multiple potential stocks.

What Is The Mystery Stock?

Unfortunately, nobody knows. But there are a few clues that can narrow down the list. These days Buffett favors companies with massive market caps, often north of $100 billion. With Berkshire’s nearly $200 billion cash hoard, he could pay in cash and so it makes sense to target enterprises that are whales in their fields.

He typically prefers companies trading at low P/E multiples, and the line in the sand broadly speculated to be his cutoff point is a forward P/E of 15.

When you narrow down the list of contenders you end up with a bunch of banks, including Morgan Stanley, HSBC Holdings, Mitsubishi UFJ Financial Group, TD Bank, UBS Corp and Royal Bank of Canada. A lone outlier here is Chubb.

A bunch of these banks are European or foreign in nature and so that may very well rule them out as Buffett tends to avoid them. Indeed it could also rule out Chubb, an international insurer.

If true that whittles the list down to the Japanese play: Mitsubishi UFJ Financial Group (MUFJ).

But What If It’s Not?

While Buffett has clearly shown a preference for Japanese companies in recent years, it’s a risky gambit for the ordinary investor to buy just one company and hope when the veil is lifted they are right.

Another perhaps smarter approach is to be inspired by Buffett’s own approach to buying airlines. He famously stated that investing in airlines was a terrible idea, though the technology was transformative. So when he did buy airlines, he bought all four major carriers at once, essentially ensuring that no matter who won and lost, he was tethered to the growth of travel overall.

Similarly, a strategy to gain exposure to all the possible stocks could be to buy call options out-of-the-money or at-the-money on all the high probability contenders.

Others have taken a similar approach though their shortlists are different. For example here is a play by one top analyst, Eric: