Is this Buffett's best run ever?
With sly buys and shrewd loans, the Oracle of Omaha made billions in the credit crunch. You can learn from his moves -- and buy a handful of stocks with him.
By Michael Brush
MSN Money （2009/11/5）
If you listened to the pundits over the past two or three years, you might have thought investing legend Warren Buffett had lost his chops.
But the last laugh belongs to the man from Omaha. In fact, as one of his key deputies, David Sokol, said on CNBC last week, the past 18 months may have been his best ever.
And they've shown us a different side of the famed buy-and-hold, value-investing genius -- a side that was aggressive and even predatory in taking advantage of the market crisis.
While everyday investors can't copy his most successful recent moves, we can all learn from how he's handled the crisis -- and make some money buying his stock or some of the ones he's been buying.
Well, he seemed out of sync
The criticism went this way: Buffett's big problem was that he had stayed in cash too long while other investors enjoyed go-go returns during the real-estate bubble. Then, with the market down and the bubble deflating, Buffett got bullish too early. He proclaimed his bullishness in an October 2008 New York Times commentary, right before the markets took another deep dive.
By the start of 2009, it was open season on Buffett. Investing pundits such as Douglas Kass publicly declared that Buffett's "salad days" were over and that the value of Buffett's Berkshire Hathaway (BRK.A, news, msgs) would "steadily suffer" with such a has-been at the helm.
Since then, Berkshire Hathaway's stock has advanced about 15%, though it's still lower than when the crunch began.
But more importantly, during the dark days of the credit crunch , Buffett was one of the few investors around with cash, because his discipline had kept him away from disaster.
He used his cash to "plant the investment seeds for very attractive long-term returns," says Justin Fuller, a partner at Midway Capital Research & Management who writes regular commentary on Buffett at Buffettologist.com.
Indeed, as the smoke clears, a fresh image of the investing genius of the Oracle of Omaha is emerging in a series of deals that will benefit anyone who buys Berkshire Hathaway stock now.
His most recent headline-grabbing deployment of some of his vast cash hoard played out earlier this week when Buffett bought the rest of Burlington Northern Santa Fe (BNI, news, msgs) -- the 77.4% of the railroad he did not already own. This move served as an "all in" bet on the future of America, Buffett said in announcing the deal.
The Bank of Buffett
His best move during the credit crisis? A huge loan to troubled Goldman Sachs (GS, news, msgs), arranged in late summer 2008, when few investors would touch anything at all in the financial sector.
Highlights of the deal:
- Buffett locked in a 10% annual return on $5 billion he lent the Wall Street bank. Buffett gave Goldman the money in exchange for preferred stock, a hybrid of stock and bonded debt. In contrast, most investors will probably have to settle for ridiculously small returns on cash savings because the Federal Reserve is keeping interest rates near zero.
- Buffett negotiated an option to buy 43.5 million shares of Goldman at $115 per share anytime he wants during the next four years. Buffett is already up $2.4 billion on that part of the deal, with Goldman stock recently selling for $170.
Not bad for a guy who was all washed up.
Buffett negotiated no fewer than five major deals like that when the frozen credit markets temporarily turned him into the de facto lender of last resort, says Stephen Shueh, a partner at Roundview Capital , a value-oriented investing company based in Princeton, N.J.
Besides assisting Goldman Sachs, Buffett lent to strapped General Electric (GE, news, msgs) and Swiss Re (SWCEY, news, msgs), an insurance company. His funding helped British candy company Mars buy Wm. Wrigley Jr. and helped Dow Chemical (DOW, news, msgs) purchase Rohm and Haas. He also made smaller but equally favorable loans to Harley-Davidson (HOG, news, msgs) and Tiffany (TIF, news, msgs).
Despite Buffett's aw-shucks, regular-guy image, he used his position of strength to exact what looked like predatory terms when borrowers had few options.
Merely accepting opportunity?
Buffett aficionados caution against calling him predatory, of course. They say Buffett was only doing what he does best: exercising discipline to avoid blowing money on frivolous bets so he'll have plenty of cash around when others need it the most -- and will pay him the most to borrow it.
"My sense is he's not out running around looking for people in trouble and saying, 'Call me if you want to get burned,'" says Larry Coats, Jr., a co-manager of the Oak Value Fund (OAKVX). "He's often said he sits by the phone waiting for it to ring. Typically, people tell him what they want to do, and he says yes or no."
Coats describes Buffett as opportunistic rather than predatory.
Though Buffett's easiest profits will come from these loan deals -- often with options attached to buy the stock of the borrower at favorable prices -- Buffett also made some particularly savvy moves in stocks.
During the first quarter of this year, when so many investors were dumping stocks, Buffett added to positions in Wells Fargo (WFC, news, msgs), US Bancorp (USB, news, msgs), Burlington Northern, Union Pacific (UNP, news, msgs) and Nalco (NLC, news, msgs), a water-treatment company.
We don't know exactly the prices Buffett paid, but all of those stocks have done very well since his purchases. The two banks have tripled from their lows in March. Nalco has doubled. And the two railroads were up 50% to 60% before Buffett moved them even higher by purchasing Burlington Northern.
Buying stocks like Buffett
That's great, you say. Buffett did well, which is hardly a surprise. But what can I, as an individual investor , get out of all of this?
There's plenty to be gained in terms of both profit and investing wisdom.
We regular investors can't imitate Buffett's sophisticated lending deals, but we can profit from his moves.
Just counting the bigger deals, Buffett lent more than $18 billion during the credit crunch , on very favorable terms to Berkshire Hathaway. The return will be enough to move the profit needle significantly at Berkshire, Roundview Capital's Shueh says.
That's why Shueh believes Berkshire is still a buy despite the big move off its March lows. "Berkshire Hathaway continues to trade at the low end of its valuation range," he says.
(Note to would-be buyers: While the main Berkshire stock, BRK.A, at around $100,000 a share, is out of reach for most investors, the B-class shares, BRK.B, can be snagged for a mere $3,300 and change each.)
You can also follow Berkshire Hathaway's moves in two stocks -- Johnson & Johnson (JNJ, news, msgs) and Becton, Dickinson (BDX, news, msgs) -- by purchasing right now, because they haven't advanced much from where Berkshire recently bought. (Below, I list four other Buffett stocks that look like buys because they still look reasonably cheap.)
As for investing wisdom, Buffett comes out of the credit crunch a winner because he followed two of his basic rules:
- Instead of getting caught up in the real-estate-driven bubble and paying too much for stocks, he waited for the great deals that became available as the markets fell apart. This was easy for him to do because his investing style is based on "lethargy bordering on sloth."
- He also behaved like a true contrarian during the credit crunch. He got greedy -- making deals and buying stocks hand over fist -- while others were fearful, to echo one of his most famous axioms.
Buffett stocks to buy now
I'll guide you to two other groups of Buffett stocks to buy now. In the first category, I include Berkshire-held stocks that presumably still trade at levels where Buffett presumably bought. (I had Burlington Northern on this list until it was purchased earlier this week by Buffett, driving the stock up from around $76 a share to more than $97.)
I say "presumably" because, unless Buffett tells us, we don't really know what he paid for stocks in the Berkshire Hathaway portfolio. He does have to report changes in the portfolio in 13F filings with the Securities and Exchange Commission each quarter. (Reading those closely followed reports is a good way to track Buffett holdings, by the way.)
There's some guesswork involved, and the cleanest way to do this is to take the midpoint of where the stock traded during the quarter in which he reports purchases.
According to the Web site GuruFocus.com, Johnson & Johnson and Becton, Dickinson still trade for less than 10% of the midpoint of their trading ranges in the second quarter, when Berkshire Hathaway bought each stock.
Johnson & Johnson is diversified in medical devices, medicine and pharmaceuticals, and Buffett has liked it for years. Because of its strong brand name, numerous patents and productive research pipeline, Johnson & Johnson has the kind of "economic moat," or protection against competitors, that piques Buffett's interest. It also has two other favorite Buffett qualities: solid financial strength and prodigious cash flow.
Becton, Dickinson sells instruments used in surgery, including needles, syringes and scalpels. Its sheer size and innovation (most recently it rolled out a line of needles that are safer because they help prevent accidental needle pricks) help keep competitors off its turf. Becton, Dickinson also produces a lot of free cash flow, which is used in part to support a 1.9% annual dividend yield.
The second group of Berkshire Hathaway-held stocks I'd suggest buying right now includes those with five-star ratings at Morningstar. Like Buffett, Morningstar has a strict value discipline that guides investors to potentially good stocks by directing them away from stocks that look too pricey. Plus, five-star stocks must have several of the other qualities that Buffett likes, such as solid financial strength and a reasonably strong economic moat.
Besides Johnson & Johnson and Becton, Dickinson, the only Berkshire Hathaway stocks with five-star Morningstar ratings right now are cable company Comcast (CMCSA, news, msgs), home-supply chain Lowe's (LOW, news, msgs) and consumer-products company Procter & Gamble (PG, news, msgs).
One more: a 'Buffett' IPO
Intriguingly, Buffett did not sell shares of Verisk Analytics (VRSK, news, msgs) when the company reached the market in an initial public offering earlier this month. Verisk Analytics is an insurance-industry consultant that helps insurers meet complex state legal and regulatory requirements, and write policies.
Before going public, Verisk was owned primarily by property and casualty insurers like Berkshire Hathaway, American Insurance Group (AIG, news, msgs) and Hartford Financial Services (HIG, news, msgs). The Verisk IPO was launched mainly to give strapped insurance companies a chance to raise funds by liquidating positions.
But Berkshire Hathaway didn't sell its stake in Verisk -- a vote of confidence in the company, Morningstar analyst Justin Perucki believes.
This might seem like a roundabout way to find a Buffett stock. But with a sly investor like Buffett, you have to resort to some sly techniques.
