Warren Buffett's 8 Best Investment Plays
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Financial Intelligence Report
The Global Resource to Protect and Grow Your Wealth
Special Report
Warren Buffett’s
8 Best Investment Plays
By Brian O’Connell A film of Berkshire Hathaway chief Warren Buffett playing a
ukulele and singing, “When the NASDAQ’s down, you’ll
What’s the secret to Warren Buffett’s investment success? never frown, Berkshire’s here to stay.” In typical fashion, the
The secret, according to the Sage of Omaha, is that there folksy Buffett later led a visit to the local Dairy Queen down
is no secret. “All there is to investing,” he says, “is picking the street, which, by the way, he owned.
good stocks at good times and staying with them as long as
So, what’s on Buffett’s mind these days? In this Financial
they remain good companies.”
Intelligence Report special report, “Warren Buffett’s 8 Best
Buffett has done that in spades over the past 40 years — Investment Plays,” we’ll lay it all out for you. From why
at the helm of Berkshire Hathaway, one of the most China is the next big opportunity on Wall Street to why,
successful investment companies in the history of Wall thanks to rampant American consumerism, the U.S. dollar
Street. The $44 billion company is like a block of granite in is in great peril, we’ll show you what Wall Street’s greatest
an otherwise fragile investment environment. Astute living legend considers to be the biggest economic and
investments in brand-name value plays like Coca-Cola, investment plays on the world stage. Eight of them, in fact,
H&R Block, American Express and Comcast have fueled all culled from the laser-sharp mind of the Sage of Omaha.
Berkshire Hathaway’s rise to the top of the global investment
We’ll also delve into Buffett’s personal investment
period. All solid, no-nonsense companies that offer investors
philosophy and detail, point by point, the investment traits
the three things that Buffett prizes in his investment picks:
and characteristics that Buffett has used over the years to
steady growth, good management and no surprises.
drive his mega-billion company, Berkshire Hathaway, to the
Buffett’s results speak for themselves. A $10,000 top of the investment charts.
investment in Berkshire Hathaway in 1965 would be worth
It’s a story worth hearing … and NewsMax is here to tell it.
nearly $30 million by 2005. In contrast, $10,000 in the
S&P 500 would have risen to roughly $500,000.
The Buffett Way
Consequently, Buffett is a Zen-like figure to both Wall
Street and Main Street. Business writers and stock market Before we examine Buffett's eight key financial plays for
analysts jot down his every utterance. Berkshire Hathaway 2005, as explained by the guru himself, the investment
annual meetings are almost mythical events, with a small philosophy that earned the Sage of Omaha $40 billion is
army of Berkshire investors — and Buffett zealots — worth examining.
hanging on his every word. And he always delivers. Call it the Buffett Way — as many people do.
Prior to Berkshire Hathaway’s six-hour annual general In this day and age, when traditional investment like
meeting in May 2002, investors began lining up for seats at stocks and bonds ebb and flow along with the economic
4 a.m. Attendees were not disappointed. Among the treats? tides, seemingly tethered to nothing and batted about inWarren Buffett Financial Intelligence Report Page 2
global financial markets on an almost daily occurrence, flying and Berkshire’s stock was flopping. While the experts
there is comfort in the knowledge that a visionary like considered Buffett’s fixation on value (and values) old hat,
Warren Buffett exists. His company, Berkshire Hathaway, is the Sage proved them all wrong. But now it’s an old hat
one of the most successful businesses in American history, that lots of people would like to try on to see if it fits, just
if not the most successful. As noted above, a $10,000 like Cinderella’s glass slipper.
investment in Berkshire Hathaway when Buffett took
control in 1965 would be worth over $50 million today. The Buffett Saga
Buffet himself has a personal net wealth of more than $40
billion, making him the second-wealthiest individual in the Warren Buffett’s story is quintessentially American. He
U.S. (behind Microsoft founder Bill Gates). is by most counts the second-richest man in America (the
richest is Bill Gates) with a fortune estimated by Forbes
But it wasn’t so long ago that the so-called “experts” on magazine at more than $44 billion. He is the only U.S.
Wall Street were laughing at Warren Buffett, mocking his billionaire to have made his money entirely through
cautious, carefully measured methodology of investing in investing, and today, along with Alan Greenspan and Paul
the financial markets. Volcker, both chairmen of the Federal Reserve, he is
To the self-proclaimed gurus, Buffett’s take on things arguably the most respected voice of financial America.
seemed out of tune. The rules of the game had changed, His natural habitat is not Wall Street or Washington,
and he just didn’t get it. “Warren Buffett should say, ‘I’m but the unpretentious Midwest heartlands. We’ve told you
sorry,’” fumed Harry Newton, publisher of Technology about his moniker “The Sage of Omaha,” but that is not
Investor Magazine, in early 2000. “How did he miss the his only nickname. Buffett is also known as the Oracle of
silicon, wireless, DSL, cable, and biotech revolutions?” Omaha, Omaha being the pleasant but largely
That was a year when America Online stock rose sixfold unremarkable Nebraska city on the banks of the Missouri
and Amazon.com had rocketed by 1,000 percent in a year, River where he was born and raised, where he made his
while shares in Berkshire Hathaway, the investment fortune and where he lives to this day, in the same gray
company Buffett had built virtually from scratch, had stucco house he bought for $31,500 back in 1956.
climbed — cue ominous music — only 11 percent.
Buffett is today the best-known Nebraskan on earth, a
But, as history has proved, the Buffett Way won out in gray-haired, no-nonsense Man of the Heartland who has
the end, as the Dot-Com bubble exploded, leaving millions been triumphantly vindicated by financial market events
of Americans with huge holes in their investment portfolios time and time again. He is not so much a financial
and more than a few “experts” with egg on their faces — institution as a national institution, the object of a cult that
experts who right now would kill for 11 percent attracts around 22,000 people to Omaha every May for
investment returns. Yes, wise old Warren (“a lifelong Berkshire Hathaway’s annual meeting. Buffett himself has
techno-phobe,” as he confesses on the Berkshire Hathaway called the occasion the “Woodstock of capitalism.” Some
Web site) stuck with boring blue chips like Gillette, Coca- people buy a Berkshire Hathaway share just to attend (not
Cola and American Express, saying he couldn’t understand as small a matter as it sounds, for old-fashioned Warren has
these newfangled companies. never been one for fancy devices such as stock splits, and a
What did Buffett know that the Dot-Com geniuses single share of Berkshire Hathaway stock can cost upward
didn’t? How to look for good value plays. Buffett and his of $80,000).
partner, Charles Munger, began looking closely at Dot- In this age when CEO stands in many minds for chief
Com company valuation sheets and came away convinced embezzlement officer, Buffett embodies those Midwest
that there was more folly than fortune in all those virtues of probity, modesty and common sense Americans
celebrated new-economy companies. Instead, they returned like to think of as part of the national character. It should
to the grounds they had tilled before and knew so well —
be noted that this same part of the world spawned Arthur
value stocks. They invested in companies like Procter and
Andersen, once held as another paragon of honesty and
Gamble that made products that people actually used.
good housekeeping. But Buffett has kept his halo. He is a
It is hardly necessary to point out that this was during CEO for the nation, the self-made man who made his
the age of irrational exuberance, when the NASDAQ was fortune honestly, the scourge of less-principled peers.Warren Buffett Financial Intelligence Report Page 3
Not So Fast, Mr. Greenspan bargain prices, and the Berkshire Hathaway phenomenon
was born.
Affable and avuncular with the media and, especially,
with Berkshire Hathaway shareholders, Buffett can be very Now, when Buffett speaks, ordinary Americans not only
combative when it comes to getting his point across — listen, they are enraptured. But the truly sacred texts of
even if his intended target is one of the most powerful men Warren Edward Buffett are Berkshire Hathaway’s annual
in the world. letters to shareholders, studied at business schools across
the country and collectively published in 1998 as “The
A few years back, Buffett and Federal Reserve Chairman
Essays of Warren Buffett.” They are pithy and wise, sprinkled
Alan Greenspan agreed to disagree about the effect that so-
with the endearing admissions of human failure that a
called “derivative securities” would have on financial
deity may occasionally permit himself.
markets. Greenspan said they had reduced risk. Buffett saw
things differently. In his letter to shareholders in 2003, The 2001 edition, for instance, contains a huge mea
Buffett called them “weapons of mass destruction.” culpa for his failure to protect General Re, one of Berkshire
Hathaway’s re-insurance units, from the shockwaves of
A Student of Graham the September 11 terrorist attacks. Buffett well knew
that a mega-catastrophe (albeit more likely natural than
The foundations of the Buffett legend were laid young. man-made) was possible. “I violated the Noah rule,” he
The son of a stockbroker and Republican congressman, groveled. “Predicting rain doesn’t count; building arks does.”
he made his first trade in 1941 when he was just 11, buying Few shareholder letters quote Horace. But BH’s in 2001
three shares in a company for $38 apiece. They dropped to noted that “Many shall be restored that now are fallen and
$27, then rose to $40, at which point the cautious youth many shall fall that are now in honor” — which pretty
sold, earning a tiny profit but missing a later climb to $200. succinctly describes the reversals of reputation, between
These events sowed the seeds of his lifelong investing 1999 and now, of Buffett on the one hand and AOL-Time
philosophy, that share-buying is for the long term. Warner on the other, not to mention disgraced erstwhile
As a child he was industrious in the extreme — running superstars like Ken Lay of Enron and WorldCom’s Bernie
a double paper route and collecting lost golf balls, selling Ebbers.
them and putting the proceeds toward buying 40 acres of
farmland, which he then rented out. College in Omaha
was followed by a graduate degree at Columbia University Buffett’s Keys to Profitable Investing
in New York City, where he met and worked with What strategies does Buffett deploy when picking stocks?
Benjamin Graham, the author of “The Intelligent Investor” For starters, he looks for companies with solid financial
and eventually Buffett’s financial mentor. performance managed by seasoned and savvy executives.
Graham’s strategy was to search for what he called “cigar Buffett also favors companies with histories of above-average
butt” companies, no longer of interest to the market and earnings growth. His holdings in American Express and
thus undervalued, but which still had a few puffs of life in Coca-Cola are good examples of that.
them. In 1962 Buffett found one — a rundown Here is a list of additional attributes Buffett looks for
Massachusetts textile concern called when buying stocks:
Berkshire Hathaway. He poured what
Buffett-isms … ➡ Simple Businesses. Buffett likes to
resources it had into other businesses,
“In the business world, keep things simple — and he likes his
notably insurance. the rearview mirror companies to do the same. Again and again,
It was a stroke of genius. Insurance is always clearer than Buffett has railed against the kinds of
companies may not be hugely profitable the windshield.” companies that seem too complicated or that
intrinsically, but they have a “float,” up-front are difficult to valuate. His avoidance of
premium payments from policyholders, from which claims Internet and technology companies during the
are settled only later. The cash pile grew during the early Dot-Com bubble is the most famous manifestation of his
1970s bear market on Wall Street. “keep it simple” dictum. Buffett jokingly calls himself a
Buffett used the money to buy stakes in companies at techno-phobe, but in reality he shies away from technologyWarren Buffett Financial Intelligence Report Page 4
and telecom stocks. He likes to base his stock picks on, The ‘Big Six’
among other things, what a company will look like 10
There are other highly visible cues to take from the Sage
years down the road. Technology companies, he says, are
on his investing philosophy. In fact, Buffett’s investing
much too volatile and risky for that kind of analysis. The
criteria are outlined in his yearly reports to shareholders.
10-year rule also applies in a backward sense — Buffett will
They are:
consider only those companies with a good 10-year track
record. Most technology companies haven’t been around 1. Large purchases (at least $50 million of before-tax
that long and, for their lack of seasoning and earnings earnings).
history, tend to fall off Buffett’s radar. 2. Demonstrated consistent earning power (future
➡ Return on Equity. Another key criterion for Buffett projections are of no interest to him, nor are
is a company’s return on equity (ROE). Again, he favors a “turnaround” situations).
10-year plan, where he can predict ROE 10 years out. 3. A history of earning good returns on equity while
Companies that can’t be gauged accurately don’t make it employing little or no debt.
into the Buffett portfolio. Buffett also favors companies
that don’t need much capital. Such companies, he has said, 4. Management in place (he can’t supply it).
generate significantly higher returns on equity. 5. Simple businesses (if there’s lots of technology, he
➡ Cash on the Barrel. The Buffett Way is long on won’t understand it).
companies that have deep pockets. Companies that have 6. An offering price (he doesn’t want to waste his or the
what Buffett refers to as ample cash flow are companies seller’s time by talking, even preliminarily, about a
that have plenty of financial resources both to pay their transaction when the price is unknown).
bills and to keep growing.
Source: Berkshire Hathaway annual report
➡ Low Debt. Companies that can limit and manage
Buffett has said candidly that, if a company falls within
their debt are high on Buffett’s priority list. Insurance
these criteria, don’t call an investment banker, call him.
companies (he owns both Geico and General Re) are
particular favorites in this regard. With the Buffett Way,
low debt equals significant room for growth. Buffett’s For Buffett, It’s All About Businesses …
emphasis on low debt is grounded in reality. With limited Not Stocks
debt, earnings growth is based on shareholders’ equity as
Buffett can be a bit of a contrarian, sliding away from
opposed to borrowed money.
his own investment philosophy from time to time. Some
➡ Emphasis on Value. Historically, Buffett has targeted Buffett watchers were surprised by his modest investments
investments in undervalued companies with good long- in struggling companies like Level 3 Communications, a
term growth potential. Identifying such companies isn’t fiber optics network operating in the red, and The
easy, but Buffett has mastered the technique. In a nutshell, Williams Cos., an energy group. Buffett is known for
Buffett favors stocks that are unjustifiably low based on preferring old-economy companies and firms that are
their intrinsic worth. He bases his calculations of intrinsic already in the black. He doesn’t like technology companies
worth by analyzing a company’s fundamentals. As with because he says that he doesn’t understand technology. He
most bargain hunters, Buffett targets companies that are invests in companies like Gillette because he loves the fact
good revenue producers and are capably managed, though that millions of men grow whiskers every night. But the
underpriced. investments were not a complete surprise to true Buffett
Buffett is also famous for his aversion to reading stock aficionados. Buffett had said that if markets fell
market tea leaves. That’s not what he is about. Quite significantly, he would use that situation as a buying
simply, he selects stocks solely on the basis of their overall opportunity — and he did.
potential as a company. Once Buffett adds a stock to his In the end, Buffett’s investment philosophy is also
portfolio, he will hang on to it for years — even decades. attractively simple. He believes that investors should be
Buffett could care less if other investors ever get around to buying a business, not simply a stock. Buffett’s annual report
recognizing the stock market’s value. His only concern is is nothing if not readable — quite famously so — and is
that his companies earn money — and lots of it. perhaps the best window into the way his mind works.Warren Buffett Financial Intelligence Report Page 5
One of his annual reports contained what is probably as found the bottom of the cup more often for Tiger Woods
clear a one-paragraph summary of Buffett’s investment has to do with luck, not skill. No, like Woods, Buffett has
philosophy as can ever be stated: “Whenever we buy something we mere mortals have no real hope of emulating
common stocks … we approach the transaction as if we — which leads to the real Buffett paradox, a phenomenon
were buying into a private business. We look at the that is quite the opposite of the supposed random walk
economic prospects of the business, the people in charge of theory. Just as Woods is far more likely to ascribe his
running it, and the price we must pay. We do not have in success to hard work than to his supernatural talent, so too
mind any time or price for sale. Indeed, we are willing to does the greatest investor of our time make investing seem
hold a stock indefinitely so long as we expect the business easier than it actually is.
to increase in intrinsic value at a satisfactory
Listening to him speak, reading his many
rate. When investing, we view ourselves as Buffett-isms … writings on investing, absorbing his message,
business analysts — not as market analysts, “Only buy something even watching his investment moves over the
not as macroeconomic analysts and not even that you’d be perfectly years, an investor is more likely to gain hope
as security analysts.” happy to hold if the than to lose it. How difficult can it be, after
Thus the Buffett paradox. On the one market shut down all, to buy Coca-Cola and hold it forever —
hand, this paragraph is so steeped in old- for 10 years.” a practice at the core of Buffett’s investment
fashioned values — largely vanished from methodology? It should make the average
trading-obsessed Wall Street — that one can immediately investor feel a lot more confident, knowing that Buffett
understand why Buffett has followers. On the other hand, firmly rejects all the fancy-pants trading techniques so
it’s clear that Buffett’s investing style just isn’t that difficult beloved by modern Wall Street — techniques that make it
to understand. It’s nothing more than a balanced four- seem as if the big boys have an insurmountable advantage
legged stool: Buffett cares about the future prospects of the over the rest of the hoi polloi. Simplicity is the key.
business. He wants to know that management has both
integrity and drive. He doesn’t want to overpay for the Buffettology Redux
stock. And whether the shares go up or down, he won’t sell
so long as the fundamentals remain the same. Pretty So why doesn’t everyone invest like Buffett? For one
simple, right? thing, very few people can stomach the ups and downs
of the market without wanting to jump on and off. For
most investors, it is difficult not to panic when the market
The Buffett Paradox tanks, and it can be tricky to resist jumping on a really hot
So, is it a bit over the top to call Warren Buffett a stock. The even-keeled thinking necessary to be a great
modern-day miracle worker? Probably not. investor is an extremely rare thing. Buffett, however, has
that trait in spades. He is happy when markets tank
It’s not as if he is parting the Red Sea, though his
because it means he can buy stocks he wants at a cheaper
investment record — an average annual gain of over 30
price.
percent since 1965 — is not too far off. He is certainly a
living, breathing antithesis of the “random walk” theory The second reason most people don’t invest like Buffett
beloved by economists attempting to is because his methods are a lot more
rationalize market behavior — the theory Buffett-isms … complicated than they appear. When Buffett
that stock movement is random because all “We simply attempt to talks about the “economic prospects” of a
information about the future prospects of a be fearful when others potential investment, he is talking about the
company has already been built into the are greedy and to be position of the business 10 years down the
share price. They try to explain away greedy only when others road. So if he can see the business remaining
Buffett’s unusual success by pointing out are fearful.” dominant for the next decade, he’ll consider
that in any game of chance someone has to buying the stock. Buffett has an uncanny
come out on top and it just happens to ability to predict very accurately which companies will be
be him. dominant players in 10 years — a gift not many investors
can claim.
But of course everyone knows that’s not true. It’s sort
of the equivalent of saying that the reason the golf ball This gift may be partly based on Buffett’s genius when itWarren Buffett Financial Intelligence Report Page 6
comes to numbers. “Accounting,” he likes to say, “is the Warren Buffett’s Eight Top
language of business.” It is a language in which his own
Investment Plays
fluency is unsurpassed, and which gives him an enormous
competitive advantage. Usually, all he needs is a quick So here we are.
glance at a balance sheet to know whether he’s interested in Now, thanks to our Financial Intelligence Report
buying a company or not — because he finds meaning in special report “Warren Buffett’s 8 Best Investment Plays
numbers that most investors are not capable of for 2005,” you know what Warren Buffett looks for in
understanding. picking great companies and great investment plays.
Many students of Buffettology have struggled to get It’s a combination of tried-and-true value selections and
their heads around accounting ideas that are second nature some contrarian bets on higher-risk investment vehicles
to him. A classic example is “intrinsic value,” which is like derivatives and global currencies.
Buffett’s way of evaluating the true worth of a company — Let’s take a look at the most recent additions to the
and which he describes as “the only logical approach to Buffett portfolio — and see if they don’t make sense for you:
evaluating the relative attractiveness of investments and
businesses.” He has said, “Intrinsic value can be defined 1. Brewskies and Broadband. True to form, Berkshire
Hathaway’s 2005 portfolio included a stable of Buffett
simply: It is the discounted value of the cash that can be
standbys like Coca-Cola, American Express and Gillette.
taken out of a business during its remaining life.”
Newer wrinkles include a big bet on media giant Comcast
This definition may be simple for Buffett, but it’s clearly (Buffett & Co. now own 10 million shares); a significant
not that simple for the rest of the investment community, new investment in Anheuser-Busch, buying 200 million
who bang their heads against the wall trying to play catch- shares; and a big sell-off in sports consumer apparel
up with his successes. behemoth Nike.
What does the future hold in the eyes of this great The Anheuser-Busch play comes straight out of the
investment visionary? Buffett is concerned about the trade Buffett playbook. The self-styled “King of Beers” is a
deficit and the decline of the value of the U.S. dollar. consumer giant mainstay with a track record of strong sales
no matter how the underlying economy performs. Simply
In a recent interview, he said: “It seems to me that a
put, people drink Budweiser in good times and bad,
$618 billion trade deficit, rich as we are, strong as this
roughly in the same quantities. It’s the kind of well-
country is, well, something will have to happen that will
managed, dependable company to which Buffett is known
change that. Most economists will still say some kind of
to gravitate. He gave no explanation for his sell-off of
soft landing is possible. I don’t know what a soft landing is
Nike (cutting Berkshire’s holdings from 6 million to 2.5
exactly, in how the numbers come down softly from levels
million) — he typically does not comment on specific
like these.”
trades. Buffett also sold his entire 13.5-million-share stake
On risky trading, Buffett is very clear: Minimize risk. in hospital operator HCA and sold smaller stakes in
“There are more people [like hedge-fund managers] that go Wells Fargo and information management company
to bed at night with a hair trigger than ever before,” he Iron Mountain.
says. “It’s an electronic herd, they can give vent to decisions Two other potential Buffett picks are iShares Dow Jones
that move billions and billions of dollars with the click of a US Utilities and Sysco. Each offers a unique sense of contrast
key. There will be some kind of stampede by that herd. to the standard Buffett investment philosophy. While neither
When you have far greater sums than ever before, in one is currently included in Berkshire's portfolio, both stocks
asset class after another, that are held by people who possess the qualities Buffett generally looks for in his picks.
operate on a hair-trigger mechanism, then they lend The iShares ETF offers shareholders steady returns from the
themselves to more explosive outcomes. People with very utility sector while Sysco, a giant in food distribution and
short time horizons with huge sums of money, they can all marketing, parallels Buffett’s value philosophy. Sysco is a
try to head for the exits at the same time. The only way you well-managed company that has a solid foothold in its
can leave your seat in burning financial markets is to find market. It also has low debt and lots of cash to fuel increased
someone else to take your seat, and that is not always easy.” company growth.Warren Buffett Financial Intelligence Report Page 7
2. Derivatives. The buy-and-hold billionaire is up to his bonanza profits” off of his energy investments. Buffett
ears in exotic investments known as derivatives, which are tells investors that he’s not investing in energy because he
used to bet on things like the weather and the direction of thinks the returns on equity in the energy sector are going
interest rates. Derivatives were at the core of the 1994 to go up, but rather because it’s a reasonable place to put
bankruptcy of California’s Orange County and the 1998 money. “I mean, the electric utility business,” says Buffett,
demise of hedge fund Long-Term Capital Management. “it’s not a place to get rich, but it’s a place to stay rich and
Buffett once called derivatives “financial weapons of mass that’s the way we look at it. And yes, I like to stay rich.”
destruction,” so you’d think he would steer clear. But So it’s no surprise to see that Buffett added a $9.5
his company, Berkshire Hathaway, has acknowledged a billion investment in energy giant PacifiCorp (he had
$307 million pretax loss in the first three months of this already purchased electric utilities company MidAmerican
year that’s due to a $21.4 billion position in “currency Energy in 2000). Both companies offer exactly what
contracts,” which are derivatives that hit pay dirt when the Buffett likes in a low interest rate environment —
dollar falls. Problem is, the dollar is rallying. The greenback predictable, if somewhat boring, returns.
was up 4 percent against the euro in the first quarter and an
additional 8 percent since then, and it shows no signs of 4. Still Bearish on the Dollar. Buffett remains
stalling. Some experts estimate that Buffett’s losses this year concerned about what he believes is an inevitable
have surpassed $1 billion. Buffett has indicated that he’s consequence of current U.S. trade practices — if the U.S.
sticking with his bet. “There’s no change in the underlying is going to consume more than it produces, he says, we
factors affecting currencies,” he said, adding that in the long have to expect to give away a little bit of the country.
run, the U.S. trade deficit must weaken the buck. It’s not all He argues that in 2004, the U.S. had a trade deficit of
bad news for Buffett fans. He first bet against the dollar as well over $600 billion, of which nearly one quarter was
it was falling in 2002 and remains in the money overall, with China. In other words, the U.S. bought $160 billion
even though the dollar has rebounded in recent months. worth more goods from China than we sold. The problem,
3. Too Much Cash Lying Around? Try an Energy Play. he says, is that if the Chinese are going to send us shoes
One of the problems with Berkshire is that sometimes and furniture and textiles, the U.S. clearly has to give them
there’s just too much of that pesky cash coming in, and it’s something in return — little pieces of paper called U.S.
Buffett’s job to get it out the door and invested wisely. In dollars. But the Chinese don’t hold onto those little pieces
an effort to find opportunities to invest big money at of green paper. They’re converted into other assets such as
reasonable terms, Buffett has turned his attention to energy U.S. government bonds — just as the central bank has
investments. Recently, he has said that he’s planning to done. And sometimes the Chinese buy U.S. assets.
invest $10-$15 billion in energy investments over and Buffett warns that the U.S. is over-consuming to a point
above what had initially been planned. of real danger: “We’re sending out IOUs on this country
But should this shift in strategy serve as a signal to or sending out ownership of this country at the rate of
investors to look to energy investments for their own $2 billion a day.” And while $2 billion a day in an $11
portfolios? Back in the day when Enron went bust and trillion-plus economy may not sound so bad, it adds up.
Buffett was able to do what he does so well, which was to “We have gone from being a country that owned more of
buy a dollar’s worth of assets essentially for pennies in the the rest of the world than they owned of us,” says Buffett,
energy sector, there were bargains to be found. In today’s “to the country that probably is about $3 trillion in the hole
market, however, with oil hovering around $60 per barrel, right now in terms of our net-worth position. It will have an
is it reasonable to think that, rather than buying distressed effect, it may be a month from now, it may be five years
assets where a profit is clearly to be made, it’s now possible from now, who knows, but it is not without consequences.”
to enter a wave in the energy sector that will see prices for This thinking explains Buffett’s current position on the
energy commodities go up for quite a long time? dollar. He admits that he doesn’t know whether the dollar
Not really, says Buffett. “We’re not buying bargains in will be up or down in the short run, but he says that five
the field, but we think we’re getting our money’s worth years from now, if there’s no change in U.S. trade practices,
and it does offer the chance, occasionally, to employ the dollar will be significantly weaker.
really large amounts of capital.” He’s not seeking “any If you agree with Buffett that the dollar will continue toWarren Buffett Financial Intelligence Report Page 8
sink, you can easily invest in foreign currencies through can be pretty serious consequences.”
venues like Evergreen Bank. As Buffett tends to favor the
Munger: “You have a real asset-price bubble in places like
euro, a good fund that’s bearish on the dollar and strong
parts of California and the suburbs of Washington, D.C.”
on the euro is the Merk Hard Currency Fund™, a mutual
fund that invests in a basket of hard currencies assembled Buffett: “I recently sold a house in Laguna for $3.5
to protect against the fall of the dollar. million. It was on about 2,000 square feet of land, maybe
(www.merkinvestments.com) a twentieth of an acre, and the house might cost about
$500,000 if you wanted to replace it. So the land sold for
5. If You Can’t Beat ’Em, Join ’Em. In mid-June 2005,
something like $60 million an acre.”
shares of China Life Insurance Co., Ltd. jumped by 4.9
percent, driven by rampant rumors that Buffett had bought Munger: “I know someone who lives next door to what
a large quantity of China Life ADRs. Hong Kong media you would actually call a fairly modest house that just sold
reported that he had acquired 8.7 million ADRs in China for $17 million. There are some very extreme housing price
Life in May, and had also bought another 10 million ADRs bubbles going on.”
in early June. Buffett reportedly has plans to become a Buffett: (on the trade deficit and the value of the dollar)
strategic investor in China Life. Rumors are still mulling “That really is the $64,000 question. It seems to me that a
about that indicate he will purchase an additional 6.3 $618 billion trade deficit, rich as we are, strong as this
million ADRs in the company, raising the total to 25 country is, well, something will have to happen that will
million. Buffett has bought shares in China’s oil giant change that. Most economists will still say some kind of
PetroChina Company Limited as well, earning over HKD soft landing is possible. I don’t know what a soft landing is
8 billion from the deal. exactly, in how the numbers come down softly from levels
Clearly, Buffett is bullish on all things China. like these. …
6. The Real Estate Bubble. Buffett owns the same “There are more people [like hedge-fund managers] that
house in Omaha that he’s owned since the 1950s. He also go to bed at night with a hair trigger than ever before, it’s
recently sold a house he owned in Laguna Beach in an electronic herd, they can give vent to decisions that
Southern California. move billions and billions of dollars with the click of a key.
We will have some exogenous event, we will have that.
He agrees with many of the economic gurus that the
There will be some kind of stampede by that herd. …
U.S. real estate market is in a state of “disequilibrium” and
that it could be a dangerous place to sink your money. “When you have far greater sums than ever before, in one
asset class after another, that are held by people who operate
The real estate matter was a topic Buffett publicly
on a hair-trigger mechanism, then they lend themselves to
discussed at his annual board meeting with his longtime
more explosive outcomes. People with very short time
business partner Charlie Munger.
horizons with huge sums of money, they can all try to head
Here’s how the exchange went: for the exits at the same time. The only way you can leave
your seat in burning financial markets is to find someone
Buffett: “A lot of the psychological well being of the
else to take your seat, and that is not always easy. …”
American public comes from how well they’ve done with
their house over the years. If indeed there’s been a bubble, Munger: “The present era has no comparable referent in
and it’s pricked at some point, the net effect on Berkshire the past history of capitalism. We have a higher percentage
might well be positive [because the company’s financial of the intelligentsia engaged in buying and selling pieces of
strength would allow it to buy real-estate-related businesses paper and promoting trading activity than in any past era.
at bargain prices]. A lot of what I see now reminds me of Sodom and
Gomorrah. You get activity feeding on itself, envy and
“Certainly at the high end of the real estate market in
imitation. It has happened in the past that there came
some areas, you’ve seen extraordinary movement. … People
bad consequences.”
go crazy in economics periodically, in all kinds of ways.
Residential housing has different behavioral characteristics, Buffett: “I have no idea on timing. It’s far easier to tell
simply because people live there. But when you get prices what will happen than when it will happen. I would say
increasing faster than the underlying costs, sometimes there that what is going on in terms of trade policy is going toWarren Buffett Financial Intelligence Report Page 9
have very important consequences.” expenses]. Someone once asked Bill Buckley what he
would do if he actually won his race for New York mayor
Munger: “A great civilization will bear a lot of abuse,
but there are dangers in the current situation that threaten back in the 1960s and he said, ‘First thing I’d do is ask for
anyone who swings for the fences.” a recount.’ Well, that’s what I’d do at GM. You’ve got a
$90 billion pension fund, $20 billion set aside for health-
Buffett to Munger: “What do you think the end care liabilities, and the whole equity value of the company
will be?” is $14 billion. That’s not sustainable. … Something will
Munger: “Bad.” have to give.”
So, the Sage says be careful with residential real estate. A Lunch … and Buffett’s Latest
host of companies and sectors will be hit by a real estate How about … lunch with the sage of Omaha? Every
bust, so choose your investments carefully. year since 2000, Warren Buffett has to ask this question —
7. Equities, Not Bonds. In his 2005 address to and has to wait for the gavel to come down in an auction
Berkshire Hathaway shareholders, Buffett explained why to find out the answer. The lunches began after Buffett’s
his portfolio exposure to bonds is minimal — and why his wife, Susan, introduced him to Williams Glide Memorial
exposure to stocks is maximized. United Methodist Church. In an effort to help the church’s
“If you had to make a choice between long-term bonds Glide Foundation — a San Francisco non-profit
at around 4.5 percent and equities for the next 20 years, I organization that offers programs for the poor, hungry and
would certainly prefer equities,” he told the audience of homeless — Buffett donates a lunch to be auctioned off to
22,000 shareholders. “But if people think the highest bidder each year.
they can earn more than 6 to 7 percent a Tough Old Barnacle
The billionaire Buffett hosts the auction
year, they’re making a big mistake. I don’t Buffett clung to his
winner and up to seven friends for lunch in
think we’re in bubble-type valuations in “value investing”
strategy like a barnacle Omaha, Nebraska, where Buffett lives and
equities — or anywhere close to bargain works, or in New York City. In 2003, the
to the hull of a boat.
valuations. auctions were moved from San Francisco to
Once he was asked to
“If you told me I had to go away for 20 suggest the best time to the ether world via eBay, where they have
years, I would rather take an index fund sell stock — and become an annual online pilgrimage for the
over long-term bonds. You’ll get a chance to famously replied, Buffett faithful.
do something extremely intelligent with “Never.”
People looking to learn from the wise one
your money in the next few years. But right
bid every year, like Mohnish Pabrai, a
now there doesn’t seem to be a clear enough direction to
managing partner of Pabrai Investment Funds in Lake
conclude anything dramatic.”
Forest, California, and Singapore resident Jason Choo, who
8. Baby, You Can’t Drive My Car. Buffett is extremely won the auction in 2004 with a $250,000 price tag. Pabrai
bearish on auto stocks, primarily because of the heavy has bid on the lunches for three years and lost every time
pension and benefit liabilities the big American car makers — and as a passionate disciple of Buffett for more than a
are paying to workers. Says Buffett, both GM and Ford decade, he plans to bid again next year.
have a steep legacy cost structure, with contracts put in The 2005 auction, brought in a winning bid of
place decades ago, that make it very difficult for them to $351,100, all of which goes to the Glide Foundation.
be competitive in today’s world. “Just imagine if they’d What does the winner get for his $350,000 lunch? Some
been made to sign contracts that made them pay several people consider it a cost-effective way to get one-on-one
more tons per steel than their competitors have to, people time with the master, and the opportunity to set the
would feel that’s untenable,” he adds. “[GM and Ford] agenda for the conversation. Says Buffett about what next
have to pay contracts that give them immense obligations year’s winner can expect for their investment: “We’ll talk
for health-care and retirement annuities at high cost. Their about anything you want to talk about. Except I won’t tell
competitors can buy steel and other commodities no what we’re buying. I don’t tell anyone that.”
cheaper, but the competitors don’t have nearly the same So make sure you’re ready to place your bid for lunch
level of costs for these [health-care and retirement with the master next June on eBay.Warren Buffett Financial Intelligence Report Page 10
In the meantime, FIR can tell you about some of shares of the world’s largest brewer, as well as close to 20
Buffett’s latest maneuvers. million shares in super-retailer Wal-Mart. Buffett had long
sought to keep these holdings secret — in order to defend
We have been following Warren Buffett like a hawk this
against copycat investing.
year, and we will continue to closely monitor the
investment savant’s movements.
Here’s the latest: The Oracle of Omaha is apparently
An American Icon — and a Role Model
trying to grab a piece of insurance giant Lloyd’s of London for Investors
— and that’s a controversial move considering the industry They don’t make Americans like Warren Buffett anymore.
has struggled in 2005.
Tough, plain-spoken, and with a genuine concern
So what does the visionary Buffett know that the rest of toward average investors — the little guys — getting a fair
us don’t? shot on the stock market, Buffett is a real man of the
In this case, the details are in the back story. people, much more Main Street than Wall Street.
Sources tell the London Telegraph that Buffett has He’s famous for berating Wall Street on its emphasis of
approached at least one managing partner at Lloyd’s, churn-and-burn brokerage mindset, and has publicly stated
that every American investor would be better off if he or
offering money for a share in next year’s business.
she executed only 20 stock trades in their entire lives. He
Nigel Hanbury, chief executive of Hampden Agencies, has also pounded the table a time or two on the subject of
tells the paper that Buffett looks poised to pour more personal liberty and the importance of Americans taking
money into insurance in 2006. responsibility over their own lives.
“Premiums are expected to be very good for 2006 and Warren Buffett is the quintessential American success
probably 2007,” he says. “The price of insurance for story. What makes him unique is that he genuinely believes
energy risks like oil rigs is expected to soar by 400%, and there is a success story in every American, just waiting to
areas that have been hit by hurricanes could see premiums blossom.
up by 100%.”
If, that is, the owners of those success stories spend a lot
In addition, it was recently disclosed that Buffett’s of time doing what Buffett does: digging for those “cigar
Berkshire Hathaway holds a 5.7% stake in Anheuser- butt” companies that offer value to discerning investors.
Busch, making it the largest shareholder.
To Buffett, it’s value that counts — and he’s spent the
As of October 2005, Berkshire held almost 45 million past 40 years proving just that.Warren Buffett Financial Intelligence Report Page 11 A Snapshot of the Largest Berkshire Hathaway Holdings, December 31, 2004 Berkshire Hathaway portfolio Company 2004Q3 Shares 2004Q4 +/-% American Express (AXP, news, msgs) 151,610,700 151,610,700 0% American Standard (ASD, news, msgs) 10,497,900 10,497,900 0% H&R Block (HRB, news, msgs) 14,350,600 14,350,600 0% Coca Cola (KOK, news, msgs) 200,000,000 200,000,000 0% Comcast (CMCSA, news, msgs) 5,000,000 10,000,000 100% Comdisco (CDCO, news, msgs) 1,489,628 1,509,433 1% Costco Wholesale (CSCO, news, msgs) 5,254,000 5,254,000 0% Dean Foods (DF, news, msgs) - 375,500 New First Data Corp. (FDC, news, msgs) 8,000,000 8,000,000 0% Gannett (GCI, news, msgs) 3,447,600 3,447,600 0% Gap Inc. (GPS, news, msgs) 15,000,000 15,434,243 3% The Gillette Co. (G, news, msgs) 96,000,000 96,000,000 0% HCA Inc. (HCA, news, msgs) 13,500,000 - -100% Iron Mountain (IRM, news, msgs) 6,935,750 5,000,000 -28% M&T Bank Corp. (MTB, news, msgs) 6,708,760 6,708,760 0% Moody’s (MCO, news, msgs) 24,000,000 24,000,000 0% Mueller Industries (MLI, news, msgs) 1,361,900 1,361,900 0% Nike (NKE, news, msgs) 6,000,000 2,500,000 -58% Outback Steakhouse (OSI, news, msgs) 1,818,800 1,818,800 0% Petrochina (PTR, news, msgs) 659,000 659,000 0% Pier 1 Imports (PIR, news, msgs) 8,000,000 8,000,000 0% Sealed Air (SEE, news, msgs) 1,113,300 1,113,300 0% Servicemaster (SVM, news, msgs) 5,611,600 5,611,600 0% Shaw Communications (SJR, news, msgs) 22,000,000 22,000,000 0% Torchmark (TMK, news, msgs) 2,029,379 2,036,979 0.37% USG Corp. (USG, news, msgs) 6,500,000 6,500,000 0% Washington Post Co. (WPO, news, msgs) 1,727,765 1,727,765 0% Wells Fargo (WFC, news, msgs) 56,448,380 54,483,520 -3.5% Wesco Financial (WSC, news, msgs) 5,703,087 5,703,087 0% Source: SEC filings * Berkshire Hathaway does not publicly announce the dates of trades until December 31 of each calendar year. ** This list does not include all companies in the Berkshire portfolio.
Warren Buffett Financial Intelligence Report Page 12
Financial Intelligence Report offers the following informative reports on a variety of
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Issue 1 (Sept ’‘03): Crisis Investing: Protect & Grow Your Wealth
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Issue 4 (Jan ’04): Sector Investing: How To Beat the S&P Every Year
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