Diving Into Berkshire Hathaway's 1970s Investing Playbook

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  • (1:30) – Navigating A High Inflation Market: What Was Going On In The 1970’s?

  • (8:15) – What Was Berkshire Hathaway Buying During High Inflation?

  • (20:45) – Big Takeaway’s From The Pasts High Inflation Markets: HES, KHC, MDLZ, CLF, BTI, GATX

  • Podcast@Zacks.com

Welcome to Episode #286 of the Value Investor Podcast.

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

This week, she’s been taking a closer look at what Warren Buffett, and Berkshire Hathaway, were up to in the last period of high inflation during the 1970s.

Want to take a trial of Tracey’s Value Investor portfolio?

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Consulting the Berkshire Hathaway Annual Letters

The Berkshire Hathaway Chairman’s Letters are available online. Tracey started with 1978’s letter because that’s when inflation started to surge and Buffett started adding more of his folksy style into the letters.

In 1978, he talked about the “bonanza period” for insurance the prior three years where Berkshire’s per share net worth virtually doubled, compounding at about 25% annually.

But Mr. Buffett didn’t just own companies, he also bought stock through his insurance portfolios. In 1978 he had 13 holdings.

These stocks give us some insights into what Berkshire Hathaway was investing in to try and contain the damage from rising inflation.

Buffett Discusses Inflation

In the letters through 1981, Buffett directly addresses the difficulty of owning shares in companies when inflation is at double digits. Those discussions are a master class on how inflation erodes equity returns.

In addition, he also addresses the benefits of dollar cost averaging as stocks fall.

What was Berkshire Hathaway buying during these years of high inflation?

Diving Into Berkshire Hathaway’s 1970s Investing Playbook

1.       Hess Corporation HES

Hess Corporation is an independent oil and natural gas company with operations in the US, Guyana and Malaysia. In 1978, Berkshire owned the prior incarnation of Hess which was Amerada Hess. Berkshire sold it by 1979.

Hess is up 39% in 2022. It pays a base dividend of 1.4%.

Oil was one of the big winners of the 1970s. Energy stocks were too.

Should value investors be looking at Hess in 2022?

2.       Cleveland-Cliffs CLF

Cleveland-Cliffs is the largest flat-rolled steel company in North America. It was in the Berkshire portfolio in 1980 and it still exists today.

Shares have fallen 24.5% in 2022. Cleveland-Cliffs is now dirt cheap, with a forward P/E of just 3.1.

It doesn’t pay a dividend, however.

Should Cleveland-Cliffs be on your list this year?

3.       British American Tobacco BTI

Berkshire Hathaway decided to hide out in big tobacco in 1980 as it bought shares of RJ Reynolds. That company is now a subsidiary of British American Tobacco.

Investors are hiding out in British American Tobacco in 2022 as shares are actually up 14.7% year-to-date.

It’s cheap with a forward P/E of just 9.5. British American Tobacco also pays a big dividend, currently yielding 6.9%.

Should British American Tobacco be on your wish list?

4.       KraftHeinz KHC

In the 1978-1981 time period, Berkshire owned shares of General Foods which became Kraft which then became Mondelez and KraftHeinz.

KraftHeinz is the cheaper of the two, with a forward P/E of 13.6 versus 20x for Mondelez.

Shares are up 3.8% year-to-date. KraftHeinz pays a dividend, currently yielding 4.5%.

Should value investors be looking at KraftHeinz in 2022?

5.       GATX Corp. GATX

GATX is a railcar leasing and services company which in Dec 2020 acquired Trifleet, one of the largest tank container leasing businesses.

Berkshire Hathaway bought shares in GATX in 1981. And now, in 2022, it’s hot again. Shares are up 55% over the last 2 years but have retreated 8.3% in 2022.

It trades at 16.2x so it’s not as cheap as some of the others.

But GATX has paid a quarterly dividend, uninterrupted, since 1919. It’s currently yielding 2.3%.

Is GATX a place to hide out again in 2022?

What Else do you Need to Know About Investing Like it’s the 1970s?     

Tune into this week’s podcast to find out.

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