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Buying Berkshire: The Ultimate No-Brainer

by: Investment U September 07, 2008 | about stocks: BNI / BRK.A / BRK.B / BUD / COP / KFT / KO / PG / SWCEY.PK / USB / WFC    

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Warren Buffett's holding company Berkshire Hathaway (BRK.B) has been the single greatest investment of our lifetimes.

His compounded annual gain from 1966 to 2007 was 21.1% for an overall gain of 400,863%, compared to 10.3% and 6,840% for the S&P 500. However, Buffett experienced a rare earnings letdown during the second quarter of this year.

Although revenue increased 10% to $29.3 billion, insurance related write-downs hurt the company's bottom line. Still, the shortfall was far from cataclysmic. For the quarter, earnings fell 7.6% to $2.88 billion. Despite the shortfall, the company still maintains a top-notch credit rating and has over $28 billion in cash, a war chest for the world's greatest investor.

How has Warren Buffett's investment strategy been so successful? He takes a disciplined value approach to investing. And he sticks with it.

Warren Buffett's Investing Questions

Before Warren Buffett invests a dime, he asks:

  • Is the company in an industry with good economics? That is, is it not in an industry competing on price?

  • Does the company have a consumer monopoly or brand name that commands loyalty?

  • Can anyone with an abundance of resources compete successfully with the company?

  • Are the earnings on an upward trend with good and consistent profit margins?

  • Is the debt-to-equity ratio low, or is the earnings-to-debt ratio high? Can the company repay debt even in years when earnings are lower than average?

  • Does the company have high and consistent returns on invested capital?

  • Does the company retain earnings for growth?

  • Does the business have high maintenance cost of operations, high capital expenditure or investment cash outflow? (If so, that's not good.)

  • Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?

  • Is the company free to adjust prices for inflation?

In short, he makes companies jump through a lot of hoops before he considers putting them in his portfolio.

Buffett's Investment Strategy - Concentrated Purchases

Buffett also makes concentrated purchases within his investment strategy. For its size, Buffett's portfolio has few stocks. But once a downturn comes, he buys millions of shares of solid businesses at reasonable prices.

Berkshire is a major player in the markets for insurance, soft drinks, chocolates, shoes, jewelry, publishing, furniture, steel, energy, homebuilding and private jets.

Berkshire owns significant portions in well-known, cheap, dividend paying stocks like:

  • Coca-Cola (NYSE:KO)

  • Wells Fargo (NYSE:WFC), one of the few U.S. banks in good standing.

  • Procter & Gamble (NYSE:PG)

  • Anheuser Busch (NYSE:BUD), which has seen a major boost in its share price thanks to the takeover bid from InBev.

  • Conoco Phillips (NYSE:COP)

  • Kraft Foods (NYSE:KFT) and others.

What is Warren Buffett Buying Now?

Besides buying large chunks of Swiss Re (SWCEY.PK), a major reinsurer, Buffett has been buying unloved - but sound - financial stocks.

He's increased his position in the Midwestern banking powerhouse U.S. Bancorp (NYSE: USB). (Documents show Berkshire is now the company's largest shareholder.)

Many household financial stocks have imploded in 2008. Bear Stearns and IndyMac, for example, are gone. Lehman Brothers is down 80% this year. Yet USB has held steady.

Buffett is also buying more Burlington Northern (NYSE: BNI), acquiring shares during the recent market weakness.

Warren Buffett's Investment Strategy & The Economic Downturn

Why is Buffett buying companies if, by his own admission, the economic downturn is likely to be deeper and longer lasting than generally expected?

  • First off, because he knows that nobody can accurately or consistently predict something as big, diverse and dynamic as the global economy.

  • Second, he knows that even if you somehow knew what was going to happen in the economy, you still wouldn't necessarily know what is about to happen in the stock market. Perversely, stocks sometimes fall during good times. They often rally during bad times.

  • Third, Buffett knows that the stock market is a discounting mechanism. It takes the news and reflects it into stock prices immediately. Who in their right mind would sell their stocks today because he realizes the economy is slowing down? We've known that for months now.

Buffett knows that nothing beats the long-term returns available in equities. Where else can you put your money to work today? With real estate caught in a death spiral? In bonds that pay less than 5%? In money markets yielding 2%?

When we first recommended Berkshire Class B shares in February 2001, they were trading at $2,295. At the peak, shares traded as high as $5,059 in December 2007, a 123% return in a little more than seven years.

Yet the B shares are currently trading at $3,860, off 24% from the 52-week high and 20% year-to-date.

History shows that when Berkshire is down 24%, it's not just a good buy…

It's an outstanding one.

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This article has 13 comments:

  •  
    Sep 07 11:37 AM
    While past performance of Berkshire Hathaway common has been undeniably superb under the rigorous eye of WEB, potential investors must be mindful of the fact that Mr. Buffett turned 78 years-old on 30 August.
    Reply
  •  
    Sep 07 01:26 PM
    And?
    Reply
  •  
    Sep 07 02:26 PM
    There is absolutley no evidence to indicate that Buffett has been buying more US Bancorp or Burlington Northern. Another misleading inaccurate post from Alpha.
    Reply
  •  
    Sep 07 02:38 PM
    RonB is correct in saying that there is no evidence of Buffett buying any US Bancrop or Burlington. As reported in my investment group at lanaslines.com, link here: www.lanaslines.com/com...

    Buffett added stakes in NRG Energy; increased stakes in IR and SNY; by his own admission on CNBC, he has also increased his stake in WFC or AXP.
    Reply
  •  
    Sep 07 02:47 PM
    and another thing, it may have been a no brainer way back when, but that may not be the case anymore. Buffett's company is struggling just like anyone else.
    Reply
  •  
    Sep 07 05:52 PM
    KO is dead money. he'd be better buying muni bonds.
    Reply
  •  
    Sep 07 11:31 PM
    KO is not dead money. Evidence their entance into the China market, which has great potential. Also, if it were that bad, BRK would be divesting.
    Reply
  •  
    Sep 07 11:32 PM
    "History shows that when Berkshire is down 24%, it's not just a good buy…

    It's an outstanding one."

    Wow, what an inspired investment thesis. Worthy of the name "The Oxford Club".
    Reply
  •  
    Sep 08 12:50 AM
    I hope Buffett newbies don;t take too much from this article. I could write a book on the things that are missing form it. But the first question WB asks is "Is this within my circle of competence?". He spends zero time on tech, and I doubt his "play money bets" into drugs will end well. And that is perhaps the MOST important question for any investor to ask.Buy what you know. If Warren ever gives up drinking cherry coke, only THEN will he divest himself of KO.
    Reply
  •  
    Sep 08 09:08 AM
    I am long BRK-B, and unconcerned by the downturn. Buffett is doing now exactly what I would do if I had hundreds of millions to play with; he is buying brokerages for 20 cents on the dollar because their only option is to go bankrupt and lose everything.

    Buffett (his R.E. manager Peltier, actually) has bought $200 million worth of quality brokerages. So what if earnings are down 7% for a quarter, or a year? They can drop 25% and the stock can drop by 50% and I will remain unconcerned as long as Berkshire's strategy remains sound.

    I am unconcerned because recessions kill everybody's profits, and what separates the winners from the losers in 2012 is whether, in 2008, they were being forced by the recession into selling their hard-earned hard assets at 20 cents on the dollar, or buying somebody else's hard-earned hard assets AT 20 cents on the dollar. Guess which side I am on.

    Buffett said from the beginning the sub-prime market was B.S. and would come to tears. Well, those tears turn out to be an opportunity, there is real value to be found in the debris of the sub-prime hurricane. It might not become apparent for years, until real estate skies are clear and sunny again, but I am glad Berkshire has all the cash, expertise, and corporate wherewithal to be first in line to cherry pick the bargains.
    Reply
  •  
    Sep 08 02:32 PM
    YOU WRITE: " (BRK.B) has been the single greatest investment of our lifetimes."
    TAKE A LOOK AT LEUCADIA (LUK) - IS HAS MATCHED OR EXCEEDED BKY IN THE PAST DECADE
    Reply
  •  
    Sep 09 09:04 AM
    I have held Berkshire fr more tha adecade and am the number #1 expert on WEB writing abook which has correctly selected hisinvestments I agree totally that BRK at these levels area great buy. IF we stay hurricane free you should see north of 4500 and if we dont the stock shouldnt be less than 3700 at which time it would be agreat buy because inurnace for super cats would go up big time.
    Reply
  •  
    Sep 09 09:23 AM
    Warren Buffet................... yea he's one of the large investers in Anheuser Busch. He's behind selling a great AMERICAN company and costing A/B emplyees there jobs, all for a quick dollar. Hey Warren the sonner they settle your estate and Gates gets your money the better.
    Reply
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