How are the billionaires investing?

This year alone Microsoft founder Bill Gates added over US$22 billion to his personal wealth, now at an eye-popping total of US$113 billion, making him the world’s richest person. Facebook CEO Mark Zuckerberg’s net worth swelled US$26.70 billion, while legendary investor Warren Buffett added a cool US$5.44 billion.

Together, the five richest people in the world saw a US$76 billion surge to their riches this year for a total net worth of US$496 billion, according to the Bloomberg Billionaires Index as at 23 December 2019. That amount is roughly equal to the GDP of Portugal and Romania combined or some 400 million troy ounces of gold.

In this wire, we break down the wealth of the richest-of-the-rich to see where and how they’re positioned for 2020, and importantly, what stock ideas and lessons savvy investors can glean from this elite bunch.

1) Bill Gates (Co-Founder, Microsoft)

• Total net worth: US$113 billion
• Wealth increase in 2019: +24.8%

Most of Gates’ fortune was derived from founding Microsoft (NYSE:MSFT), which listed in 1986 and is today the world’s most valuable technology company. After his stake in the software maker topped US$100 billion in 2000, he stepped down to focus on philanthropic efforts through the Bill & Melinda Gates Foundation.

Gates has an enviable problem: he generates more money from his private portfolio – known as Cascade Investment - than he’s able to donate to the Foundation. According to the Bloomberg Billionaires Index, Gates added US$22.40 billion or 24.8% to his wealth this year. His total current net worth of US$113 billion is on top of the US$36 billion he’s injected into the Foundation since 1994.

By the way, just for fun...

Source: Bloomberg Billionaires Index

Gates is bullish on equities, but expects lower returns

If you assumed that the world's richest person is worried about capital preservation, think again; Gates’ told Bloomberg in September 2019 that he was risk-on heading into the new decade.

“I’m bullish on U.S. businesses, global businesses. We’re not, you know, in some defensive posture where we’re mostly in cash, or anything like that. The strategy that’s been used on the investments is to be over 60% in equities.”

When asked if he was comfortable with that level of equity risk in his portfolio given the duration of the current bull market, Gates responded: “Calling market turns is a very tough thing to do.” But he doubted returns like those in the past would be repeated.

“There’s reasons to think absolute returns for the next decade will be less than they have been for the last several decades.”

What are some of his biggest investments?

To get an idea of Gates’ equity positions outside Microsoft, which he still retains a US$16.30 billion stake in (according to Bloomberg), we can look at 13F regulatory filings for the Bill and Melinda Gates Foundation Trust, which Gates and fellow billionaire Buffett have committed to donate their assets to.

Source: Form 13F, Securities and Exchange Commission (for the quarter ending September 2019)

Gates appears to be a fan of U.S. (and one Canadian) large caps that have strong grips within the industries they operate. And with the top 10 stocks making up 98.32% of the Trust’s equity portfolio, he isn’t fazed by concentration risk.

While those positions haven’t changed in some time, the Trust did make relatively small new investments this year in Beyond Meat (NYSE:BYND) and a small cap called Cornerstone Building Brands (NYSE:CNR), which provides residential and commercial building products, highlighting that Gates is willing to put a bit of cash beyond just well-known mega caps.

2) Jeff Bezos (Founder, Amazon)

• Total net worth: US$111 billion
• Wealth increase in 2019: -10.9%

The founder of Amazon (NAS:AMZN), the world’s largest online retailer, saw the largest decline in the Bloomberg Billionaires Index during 2019 due to his divorce settlement, which involved transferring 4% or US$36 billion of Amazon stock to ex-wife MacKenzie Bezos.

According to a November 2019 SEC filing Bezos retains a 12% economic interest in Amazon valued at US$103 billion. Bloomberg data suggests he has nearly US$3 billion cash in the bank. Another chunk of his personal wealth appears to be tied up in various businesses and philanthropic ventures outlined on his website Bezos Expeditions and expressed in this funky infographic by Visual Capitalist below.

A closer look at the Bezos empire

Bezos also invests money on a personal level. He was an angel investor in Google (NAS:GOOG) in 1998 and has also backed ridesharing company Uber and home sharing giant Airbnb. Note: these last two companies are listed on the Bezos Expeditions website, but on Crunchbase they are listed as personal investments.).

The fact he holds over US$100 billion in Amazon stock shows Bezos isn’t afraid of (extremely high!) concentration risk and it also likely reflects his view on the future prospects for the retailing and cloud titan. Outside Amazon, Bezos hasn’t been afraid to throw money behind causes and business ideas he believes in.

Notably, it appears Bezos is holding onto his stakes in Uber (NYSE:UBER) and Twitter (NYSE:TWTR), companies which have disappointed the market since listing.

3) Bernard Arnault (Chairman, LVMH Moet Hennessy Louis Vuitton)

• Total net worth: US$104 billion
• Wealth increase in 2019: +51.80%

Arnault is Europe’s richest person thanks to his stakes in leading retailers, namely his approximately 45% ownership of Louis Vuitton Moet Hennesy (ETR:MOH), the world’s largest maker of luxury goods.

LVMH is a stock that Magellan’s Hamish Douglass has become excited about in recent times as sales of its iconic products including Louis Vuitton bags and Dom Perignon champagne ride the wave of luxury demand in China.

The Paris-headquartered company’s German listed shares have delivered price growth of more than 210% over the last five years and 63% this year alone. Its cracking performance enriched Arnault by just over US$35 billion, the most among the five richest billionaires.

LVMH has posted record revenue and profits and increased its dividend so far in 2019, and now earns about 33% of its revenue from Chinese consumers, and Magellan reckons that percentage is likely to grow. Citing US consultancy Bain & Company forecasts, Magellan says that the Chinese share of the 260-billion-euro personal-luxury market will grow from 33% in 2018 to 45% in 2025, by when the market will be worth about 340 billion euros.

LVMH announced the biggest acquisition in the luxury goods industry last month with its agreement to buy U.S. jeweler Tiffany & Co for US$16.2 billion.

What else does Arnault own?

Bloomberg’s analysis shows that via his family-owned holding company Group Arnault, the billionaire also controls:

• 97.4% of Christian Dior, the luxury fashion house (which owns ~45% of LVMH with Group Arnault combined)
• 8.6% of Hermes International (Euronext Paris:RMS), another high street French retailer
• 1.9% of Carrefour (ETR:CAR), a supermarket and convenience store operator with exposure to over 30 countries

Arnault is certainly happy to have all his eggs in the retail basket!

4) Warren Buffett (Chairman and CEO, Berkshire Hathaway)

• Net worth: US$89.3 billion
• Wealth increase in 2019: +6.5%

Many readers of Livewire would be familiar with the planet’s most iconic investor, who holds a 16% economic interest and is Chairman and CEO of diversified conglomerate Berkshire Hathaway (NYSE:BRK.B/NYSE:BRK.A), which has rallied 12% year-to-date.

Since taking control of Berkshire over five decades ago, the 'Oracle of Omaha' has expanded it from a textile maker into a behemoth that owns railroads, insurers and infrastructure networks outright, and has substantial equity stakes in U.S. corporations. From 1995 till 2018, Berkshire has delivered compound annual returns of 20.5%, according to Buffett’s annual shareholder letter.

What does Buffett’s asset allocation look like?

Rather than deep diving into Buffett’s equity positions, it might be useful to take a high-level view of Berkshire’s overall portfolio composition to see how he’s positioned.

Through the conglomerate’s Form 10-Q (its quarterly update for September 2019) and Berkshire’s current market cap of US$540.8 billion, we can deduce the following:

• Net cash on the balance sheet – US$128 billion (23.10% of Berkshire’s current market cap)
• Equity investments - $220 billion (39.70% of Berkshire’s current market cap)

The rest would comprise many of Berkshire’s operating assets including Burlington Northern Santa Fe, GEICO, Berkshire Hathaway Reinsurance Group, Berkshire Hathaway Energy Company, Precision Castparts and so on.

While various articles give air to analysts who express concerns about Berkshire’s lazy balance sheet, Buffett was clear in his 2018 letter to shareholders about why he’s sitting on the second-largest corporate cash pile in America (only Microsoft has more at US$136.63 billion).

“Prices are sky-high for businesses possessing decent long-term prospects.”

A closer analysis of Berkshire’s equity holdings

Thankfully, CNBC has built a Berkshire Hathaway Portfolio Tracker which monitors and regularly updates Buffett’s positions. The portfolio’s value at the time of analysis is US$244.28 billion and his top 10 stocks are as follows:

Sector allocation

Buffett’s top 10 list makes up over 80% of Berkshire’s overall equity positions, so again he’s comfortable with a high level of concentration risk. It may also be useful to look at the portfolio through a sector lens to gauge the industries he’s most positive on:

• Financials (46%) - There should be no surprise here that financials, which includes everything from banks and payments companies are Buffett's favorite investment
• Information technology (26%) - Once void of technology stocks other than IBM (which he sold a few years ago), Buffett started amassing a massive stake in Apple since 2016 and disclosed in May this year that he also initiated a position in Amazon, valued at US$900 million at the time
• Consumer staples (15%) - While the likes of Coca-Cola haven’t seen the same breakneck growth as the FAANG stocks, Buffett is still a big believer in consumers, the companies’ ability to adapt to changing tastes, and he picked up KO at a much lower price
• Airlines & transportation (5%) - Between the fourth quarter of 2010 and the third quarter of 2016, Berkshire didn’t have meaningful exposure to this sector. But that changed in 2016, with Buffett taking stakes in several carriers like Delta and Southwest Airlines as fuel prices tumbled

Buffett pledged in 2006 to give US$37 billion in stock to the Bill and Melinda Gates Foundation for health and education purposes. The donations are being made in annual installments that will be completed 10 years after his estate is settled.

5) Mark Zuckerberg (Chairman and CEO, Facebook)

• Net worth: US$78.70 billion
• Wealth increase in 2019: +51.3%

Most of Zuckerberg's fortune is derived from a 13% stake in Facebook, according to the Bloomberg Billionaire’s Index. His wealth increase of US$26.70 billion has closely tracked the 53% year-to-date rise in Facebook’s stock price (NAS:FB).

The social media giant – which operates Facebook, Instagram and WhatsApp – has 2.4 billion monthly active users, according to an April 2019 company presentation. Facebook’s IPO in 2012 was the biggest tech float in history at the time.

Zuckerberg has pledged to give away 99% of his Facebook stock over his lifetime, according to a December 2015 SEC filing.

Bloomberg data shows that Zuckerberg has around US$2.63 billion in cash. His interests, much like that of his charitable organization, revolve around the areas of education and technology. He’s invested in companies including Panorama Education, Vicarious, Mastery Connect, and Asana.

What can we learn from the billionaires?

As I reflect on writing this wire, the following key lessons stood out to me (big disclaimer – this shouldn’t be taken as personal advice. They are merely my observations on how the billionaires are managing their money):

1. They aren’t concerned with capital preservation – The abovementioned billionaires aren’t selling off equities and parking all of their money in cash, gold or under the carpet concerned about the bull market ending. As Gates said: “Calling market turns is a very tough thing to do.”
2. They think long-term – Many of the positions in the billionaires’ portfolios have been held for years if not decades, so they believe in playing the long game and letting compounding do its magic.
3. They aren’t afraid of concentration risk – This is clear in Bezos’s and Zuckerberg’s willingness to keep the majority of their wealth in Amazon and Facebook stock, respectively, while Gates and Buffett control stock portfolios where the top 10 holdings account for over 80% of the value of their total equity positions.
4. They stick to their knitting – For the most part, the billionaires stick with to what they know. Arnault for example is happy to keep all his eggs in luxury retail – he understands that market, while Bezos and Zuckerberg remain largely within the realm of technology.
5. They also pivot when warranted – Whether it’s Bezos expanding Amazon into the cloud and supermarkets, Gates punting on Beyond Meat or Buffett finally jumping on the technology bandwagon with Apple (and recently, Amazon), they’re willing to invest outside their comfort zone when they can get their head around the opportunity.
6. They stay disciplined – While the likes of Buffett and Gates aren’t too worried about capital preservation, they also aren’t willing to spend excess cash given where valuations are, even if it means missing out on potential upside. As Buffett says:

“Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.”