TSMC discussion in my books
I have discussed the company Nvidia (ticker:NVDA) in two recent books; including:
In my book “The Rules of Super Growth Stocks Investing“:
- Sections 2-4, the entire section is dedicated to introducing the company TSMC
- Section 3-3, analyze the business development of technology companies to grasp the pulse of key industries
In my book “The Rules of 10 Baggers“:
- Section 3-2, the entire section is dedicated to introducing TSMC and the global semiconductor supply chain.
People keep wondering “Buffett no longer hold for long haul”. That’s whay I have this post.
Preface
Origin of this article
Ed, a reader of my Chines blog, raised a question in the comment area of his blog post “Sloth is a great virtue in stock investment” a few days ago. An excellent question about Buffett’s investing style explained by an investing friend. Since this issue is often mentioned and is worthy of discussion, it prompted me to write it into the article you are seeing now.
Ed’s question
Reader Ed’s original question is as follows:
In recent years, Berkshire Hathaway has a record of selling off its holdings, such as TSMC, Hewlett-Packard, and US Bancorp. Is this what his successor has done? Or no longer holding it for the long term?
There is no quick answer
Before entering this article, let me emphasize: Based on my many years of personal research on Buffett, the Berkshire Shareholders Meeting, and Buffett’s letter to Berkshire shareholders, I think this is a question that cannot be answered quickly with “yes” or “no”.
And Buffett has clarified that he has not promised to hold any of his holdings permanently.
Buffett decided the top holdings
Buffett said in 2022 that Buffett himself is responsible for overseeing Berkshire’s approximately US$350 billion securities investment portfolio and operating approximately 90% of it, while the remaining 10% is managed by investment deputies Todd Combs and Ted Weschler.
It is easy to judge whether to buy for Buffett. All stocks with heavy holdings (such as the top ten holdings or those holding more than 5% of the shares) must be bought by Buffett. TSMC, Hewlett-Packard, and U.S. Bank are all among Buffett’s heavy holdings.
Buffett’s original statement
2016 Berkshire Hathaway Shareholder Letter
You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations.
We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.
1996 Berkshire Shareholders Meeting
When Buffett and Munger answered questions from shareholders at the Berkshire Hathaway shareholder meeting in 1996, they had the following wonderful conversation:
Shareholders: Berkshire owns several companies — stock in several companies — which are called permanent holdings. In the early ’70s, we had a two-tier market, the one-decision stocks, high P/Es — 50, 60 times earnings. If that were to reappear again, would Berkshire’s companies still be permanent? Or is there a price for everything?
WARREN BUFFETT: Well, there are things that we think there’s no price for. And we’ve been tested sometimes and haven’t sold them, but —
You know, my friend, Bill Gates, says, you know, it has to be illogical at some point. The numbers have — at some price, you have to be willing to sell something that’s a marketable security, forgetting about a controlled business.
But I doubt if we ever get tested on — there’s only a couple of them in that category.
Actually, there — you know — I won’t comment on that. (Laughs)
We really have a great reluctance to sell businesses where we like both the business and the people. So I don’t think I’d count on seeing many sales. But if you ever attend a meeting here, and there are 60 or 70 times earnings, keep an eye on me. (Laughs)
Charlie?
CHARLIE MUNGER: The so-called two-tier market created difficulties, I would say, primarily because a lot of people or companies were called tier one when they really weren’t. They just had been, at some time, a tier one. If you’re right about the companies, you can hold them at pretty high values.
WARREN BUFFETT: Yeah, you can really hold them at extraordinary levels if you’ve got — it’s too hard to find. You’re not going to find businesses that are as good.
So then you have to say, “Am I going to get a chance to buy back the same business at a lot lower price? Or am I going to buy something that’s almost as good at a lot lower price?”
We don’t think we’re very good at doing that. We’d rather just sit and hold the business and pretend the stock market doesn’t exist.
That actually has worked out way better for us than I would’ve predicted 20 years ago. I mean, that mindset is — or 25 years ago — that mindset is — there’s been a fair amount of good fortune that’s flowed out of that that I really wouldn’t have predicted.
CHARLIE MUNGER: But there, you’re demonstrating your trick again, you know? Still learning. A lot of people regard that as cheating. (Laughter)
My interpretation of Buffett’s views
Buy and hold is still valid
Hold for long haul after buying is still the most profitable and simplest way to hold stocks, but this approach has a very important prerequisite. The purchased company stocks must be suitable for long-term holding.
Good companies are rare
My blog post “Great companies are rare, two or three will make you very rich” is about this topic. Keep in mind that even Buffett has repeatedly said that there are very few opportunities that are worthy of investors’ big bets. This is also the content of my previous post “Do it right a few times in your lifetime is enough“.
This is why Buffett advocates that when choosing investment opportunities, investors should filter in such a way that there are only 20 investment opportunities in a lifetime.
What kind of stocks are suitable?
Yes, the question comes back to what kind of stocks are suitable for long-term holding.
This is the company that Buffett identifies as a “permanent” holding of Berkshire Hathaway. Buffett has repeated this idea on many occasions. These companies are the companies controlled by Berkshire Hathaway mentioned by Buffett in the previous article.
In fact, in addition to companies that have been completely acquired and privatized by Berkshire Hathaway and become Berkshire Hathaway subsidiaries, Buffett also holds a large number of shares in a few listed companies, as he has repeatedly stated, and all of them are for long-term holdings of more than 20 years, for this part, please refer to the list of these companies compiled for everyone in my blog post “”Possibility of long-term holdings, Deep dive on Buffett’s case“.
How to select suitable companies?
As mentioned before: the company stocks you buy must be suitable for long-term holding, and what kind of stocks you buy must be suitable for long-term holding. These two core principles are. In my blog post”How Buffett Structures His Long-Term Investment Portfolio“, I detailed Buffett’s method of establishing his long-term holdings.
Recent cases study
TSMC
As I myself have repeatedly reminded Taiwanese investors in many articles on this blog – do not have the bias of only having positive comments about TSMC (ticker: TSM) and not tolerate any negative comments – once there are any Bias will affect correct judgment, especially investment, which is a professional judgment that pays great attention to thinking, facts and patience. Once too many personal preferences are mixed in, you will definitely pay a heavy price.
Buffett does not deny that TSMC is a good company (please note: good companies and good stocks are two different things). He will sell mainly because of geopolitical risks. Therefore, he regretted and sold out after holding TSMC for a very short period of time. This is Buffett’s dream. A rare investment behavior. I personally think Buffett’s statement is more euphemistic, and this is by no means the only reason. He just said this so that everyone can accept it; He gave himself an out when he dump most the stake and to admit his mistakes.
From all aspects, TSMC is really not a company that Buffett emphasizes is suitable to buy and hold for long haul (see the analysis of my previous three related posts for details: “Common creteria when Buffett pick up stocks“, “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“, and “Buffett’s Acquisition Criteria“).
Fom my long-term research on Buffett, my impression is that Buffett rarely holds such a large number of shares in a company (it was Berkshire’s tenth largest holding at the time).
If TSMC is not the only case, it is almost completely sold out within one year of holding it (86% of TSMC’s holdings were sold within one quarter of the fourth quarter of 2022). TSMC is also a rare case.
In short, his final judgment illustrates his decision. Buffett ultimately does not agree that TSMC is suitable for buying large quantities of stocks and holding them for a long time.
HP
The purchase was made in the first quarter of 2022 and increased along the way, bringing Berkshire’s stake in Hewlett-Packard (ticker: HPQ) to more than 10%. But he has been out since September 2023. With Buffett’s style, he may eventually sell all HP shares. HP is much easier. I personally think that Buffett is not good at investing in technology stocks and it is not within his circle of competence. At least for HP, he is admitting his mistakes and getting out.
HP has a very low price-to-earnings ratio, a high yield rate, and the implementation of treasury stocks (for details, see my previous post “How does HP make money? The pros and cons of investing in HP“); therefore, it is in line with Buffett’s stock selection style (for details, see My previous posts were “Common creteria when Buffett pick up stocks” and “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“).
As I said in my previous post “How does HP make money? The pros and cons of investing in HP” emphasizes: HP is a good company, but not a good stock. HP is a typical declining company among technology stocks and has no prospects. It is not suitable for long-term investment and is not suitable for judgment by Buffett’s preferred value investment method. For details, please see the special article in Section 3-2 of my book “Super Growth Stock Investment Rules”, and I will not repeat the content in the book here.
US Bancorp
US Bancorp (ticker: USB) is the fifth largest bank in the United States, with more than 3,000 branches around the country, mainly located in the western and midwestern United States. It is a typical banking stock within Buffett’s circle of competence.
As early as the first quarter of 2006, Berkshire had invested in U.S. Bank and held it for at least 16 years, which is not a short holding period. At the end of the fourth quarter of 2022, Berkshire began to reduce its holdings in U.S. Bank. At that time, the reduction was as high as 91% compared with the end of the third quarter, which heralded a huge change in Buffett’s thinking.
Buffett said at the 2022 shareholder meeting: The crisis in the banking industry in the United States has long been foreshadowed, and the U.S. banking system has become too complex. He had been selling bank stocks before, first at the start of the coronavirus pandemic and then in the past six months as banks increasingly faced problems such as mismanagement.
Conclusion
As I said in my previous post “How does HP make money? The pros and cons of investing in HP” addressed: A good company will not necessarily be a good stock. This is a big myth that most people have when investing in stocks.
“set your own rules and stick to them; never argue with the market; never make a play you can’t afford; never give way to irrational exuberance. Above all, don’t be a sucker.”
― Jesse Lauriston Livermore
The market is always right.
Related articles
- “Is Buffett no longer hold for long haul? TSMC, HP, and US Bancorp cases study“
- “Top five lucrative artificial lucrative intelligence listed companies“
- “What’s TSMC DCF intrinsic value?How to calculate it quickly with a free tool?“
- “Sloth is a great virtue in stock investment“
- “Great companies are rare, two or three will make you very rich“
- “Do it right a few times in your lifetime is enough“
- “Common creteria when Buffett pick up stocks“
- “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“
- “Buffett’s Acquisition Criteria“
- “S&P 500 index, the only stock worth holding forever“
- “Stocks are the best bet for long-term investors“
- “How Buffett Structures His Long-Term Investment Portfolio“
- “What helps Buffett to get his investment idea?“
- “Possibility of long-term holdings, Deep dive on Buffett’s case“
- “Why long-term investment is better?“
- “Investors should pay attention to the annualized rate of return (IRR), How to calculate?“
- “How does HP make money? The pros and cons of investing in HP“
Disclaimer
- The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
- I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.
