If you went to an Ivy League business school, you would probably learn about diversification and efficient markets, and how it’s not possible to beat the market. Why then do so many billionaires violate the tenets of top academics?
In simple terms, when you have an information advantage, or a winning investment thesis, you can enjoy alpha, or market-beating returns. In the case of Bill Gates, he has concentrated 84.2% of his $33.9 billion portfolio in just 4 stocks.
It’s no surprise that Microsoft tops Gates’ portfolio holdings; he was the co-founder and first CEO after all. And he still has $9.1 billion locked up in Microsoft stock, representing 26.9% of his overall portfolio.
Since Satya Nadella took over as CEO, Microsoft has transformed to a technology titan that ranks consistently among the top four technology stocks alongside Alphabet, Amazon, and Meta.
Nadella spotted the tectonic shift from hardware to cloud software and positioned the firm accordingly, thereby side-stepping the very real risk of the firm stagnating post-Steve Ballmer era to become the modern day’s IBM.
We see fair value sitting around $281 per share for Microsoft, suggesting more than double-digit percentage upside opportunity.
Berkshire Hathaway 23.3%
In some ways, Berkshire Hathaway is a single stock. In other ways, it’s a diversified fund of wide-moat stocks that should have market-beating returns for years to come. It’s also the largest company by assets in the USA.
As the second largest position in Gates’ portfolio, Berkshire Hathaway is a nod to the friendship between Warren Buffett and Bill Gates. But it’s also an economic bet with massive upside opportunity. When we ran the numbers on Berkshire, fair value sat at $410 per share, suggesting more than 33% gain potential.
Canadian National Railway 17.4%
Like his old pal in Omaha, Buffett, Gates is a fan of railways. The investment thesis behind railways is that it will prove impossible to build new railway systems ever again. They are too expensive and regulatory hurdles are too large to conceive of companies constructing railways across whole states let alone whole countries.
By our estimates, Canadian National Railway has intrinsic value of $126 per share, representing a gain opportunity for investors now close to 10%.
Waste Management 16.6%
While the top 3 holdings in Gates portfolio offer little surprise, Waste Management raises an eyebrow. Certainly, it’s hard to dispute the thesis that there will always be a need for waste management but why did Gates buy the firm? As we scrutinized the financials, it became apparent that WM could add numerous revenue streams. It also has a 19 year streak of growing its dividend payout, and currently offers close to a 2% yield.
From a valuation perspective, the fair value is less compelling. We see fair value sitting around $137 per share, suggesting a correction may be on the horizon to the tune of nearly 10%.