142 THE WARREN BUFFETT WAY
This aspect of Buffett’s investing style doesn’t receive a great deal of
attention in the f inancial press, but it is a critical part of the overall Berk-
shire portfolio. Fixed-income securities represented 20 percent of Berk-
shire’s investment portfolio in 1992; today, 14 years later, that percentage
has grown to about 30 percent.
The reason for adding these f ixed-income investments is simple:
They were the best value at the time. Because of the absolute growth of
the Berkshire Hathaway portfolio and the changing investment environ-
ment, including a lack of publicly traded stocks that he f inds attractive,
Buffett has often turned to buying entire companies and to acquiring
f ixed-income securities. He wrote in his 2003 letter to shareholders that
it was hard to f ind signif icantly undervalued stocks, “a diff iculty greatly
accentuated by the mushrooming of the funds we must deploy.”
In that same 2003 letter, Buffett explained that Berkshire would
continue the capital allocation practices it had used in the past: “If stocks
become cheaper than entire businesses, then we will buy them aggres-
sively. If selected bonds become attractive, as they did in 2002, we will
again load up on these securities. Under any market or economic condi-
tions we will be happy to buy businesses that meet our standards. And,
for those that do, the bigger, the better. Our capital is underutilized
now. It is a painful condition to be in but not as painful as doing some-
thing stupid. ( I speak from experience.)”^1
To some extent, f ixed-income investments will always be necessary
for Berkshire Hathaway’s portfolio because of Berkshire’s concentration
in insurance companies. To fulf ill their obligation to policyholders,
insurance companies must invest some of their assets in f ixed-income
securities. Still, Berkshire holds a signif icantly smaller percentage of
f ixed-income securities in its insurance investment portfolio compared
with other insurance companies.
Generally speaking, Buffett has tended to avoid f ixed-income invest-
ments (outside what was needed for the insurance portfolios) whenever
he feared impending inf lation, which would erode the future purchasing
power of money and therefore the value of bonds. Even though interest
rates in the late 1970s and early 1980s approximated the returns of most
businesses, Buffett was not a net purchaser of long-term bonds. There al-
ways existed, in his mind, the possibility of runaway inf lation. In that
kind of environment, common stocks would have lost real value, but