Buffett Likes to Be Early; Don't Rush to Follow

by: Devin Hobbes October 19, 2008 | about stocks: BNI / BRK.A / BRK.B / GE / KFT / KO / NRG / SNY / UNH / USB / WFC / WLP    

Devin Hobbes

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Warren Buffett wrote an op-ed in the New York Times last week, announcing that he's selling US bonds in his personal account and buying American stocks. Equities will outperform cash in the next ten years, he says. Naturally, everyone's excited.

In investing, Buffett says he follows Wayne Gretzky's advice: "I skate to where the puck is going to be, not where it has been." A perhaps better analogy of Buffett's investing style is getting to a New York City subway station before the train arrives. Unlike Gretzky's puck, which takes a second or two to get to where the hockey great expects it, the wait for an MTA subway train can take hours. Buffett gets to the subway station extra early (some of his recent stock purchases):

NRG Energy (NRG)
Bought: $40 to $44.43 a share
Last close: $18.18

Sanofi-Aventis (SNY)
Bought: $32.32 to $38.04 a share
Last close: $29.08

Burlington Northern (BNI)
Bought: $76.65 to $91.99 a share
Last close: $80.47

Kraft (KFT)
Bought: $28.56 to $31.66 a share
Last close: $27.50

US Bancorp (USB)
Bought: $29.07 to $34.09 a share
Last close: $30.87

WellPoint (WLP)
Bought: $43.23 to $87.63 a share
Last close: $39.92

UnitedHealth (UNH)
Bought: $34.37 to $55.95 a share
Last close: $22.63


For Berkshire's (BRK.A) 2008 stock purchases, it appears that only Wells Fargo (WFC) is in positive territory since Buffett added shares. (Buffett did use a subsidiary to purchase a 10% stake in Chinese battery maker BYD, which doubled after the deal was announced, but the above is a partial list of Buffett's domestic stock purchases.)

This is all to say that just because Buffett's buying now it doesn't mean you have to rush to buy stocks. There's plenty of time to do thorough research before jumping in. And when you do jump in, don't buy everything in one order. It's best to do it over a number of days, weeks, or months.

There is much speculation as to which stocks Buffett is buying for his personal portfolio. Names like General Electric (GE), Wells Fargo, Coca Cola (KO), and Kraft are being thrown around. Buffett may indeed be buying these, as he's said to be a creature of habit.

It's likely, however, that Buffett is also buying small and mid cap stocks. Buffett has previously said that he would generate annual returns of 50% if he had smaller sums to invest.

Given that he has far less cash to put to work than Berkshire, Buffett isn't restricted to large caps. Small and mid cap stocks have a much higher gain potential. For example, investors have to put around $200 billion into GE for it to double. A stock with a market cap of $1 billion, on the other hand, would only require investors to put in $1 billion for it to double. It would grow 200 times on the same amount of capital required for GE to go up two times.

Yes, the best time to buy stocks is when there's panic in the streets. But don't rush, and don't spend all your money in one place or at one time.

Disclosure: I owned no stocks mentioned above at the time of writing.

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This article has 32 comments:

  •  
    Oct 19 08:42 AM
    Good analysis of Warren Buffet's recent purchases and a critical analyis of his advice.
    Reply | Link to Comment
  •  
    Oct 19 09:17 AM
    I am SHOCKED that his long only picks have not been positive so far in 2008. How many long only long term investors do you know that have posted positive returns in 2008?
    Reply | Link to Comment
  •  
    Oct 19 09:40 AM
    yes, ok... we can all relate to that! an thanx fo the buffet buys info...but its not easy is it!
    Reply | Link to Comment
  •  
    Oct 19 12:26 PM
    Devin Hobbes needs to know that we all are waiting for train where time table is not fixed. It could come in a week time or it could in two years. (obviously I am talking about bottom of market) It is right approach of Mr. Buffett ; that going to subway station early and wait for train as he dose not want to miss this great opportunity to invest for long term. Can U afford to loose this opportunity ....?
    Reply | Link to Comment
  •  
    Oct 19 01:54 PM
    As usual the media( Devin Hobbs) is continuing to feed into the fear in the market. Buffet is dead on by getting into the market at this time. As the media preaches you cannot time the market but you want to be there when it rebounds. Who is Devin Hobbs to question Buffets timing into the market. If the market heeded Buffets strategy in the first place we might not be down this far. Let me know when Devin Hobbes wakes up and recognizes the unprecedented values in the market.
    Reply | Link to Comment
  •  
    Oct 19 07:29 PM
    If Buffett is not making a profit on some of his securities,where the 8 billions he has accumulated during the past few months came from? Forbes plans to crown him as the richest man of Fortune 500
    Reply | Link to Comment
  •  
    Oct 19 07:40 PM
    He may have lost a few points here and there, but he also receives something we don't generally a 10% dividend in the companies he invests in.
    Reply | Link to Comment
  •  
    Oct 19 08:21 PM
    Thanks, Devin. Nice research and analogy.
    Reply | Link to Comment
  •  
    Oct 20 01:53 AM
    Great article to put Buffett's buy orders in perspective. Buffett has a time frame for investing that is so long that even a market cycle is short for him. He'll watch a company for 10 or 20 years and then pile in when he sees the P/E look attractive for his expectations in the next 10 or 20 (i.e. his big ventures into Coke and American Express) . Its encouraging to hear he's buying but sticking a toe in the water at this stage is probably prudent for most of us, even if Warren is diving in the deep end of the pool.
    Reply | Link to Comment
  •  
    Oct 20 03:52 AM
    Actually you can invest w/ 10% dividend on GE and GS, or recently could. Ticker GED (GE bonds) and GS-D (preferred stock). Not so much upside but still room for about 30-40% capital appreciation in the long (LONG?) run. Unfortunately a lot of these are financial or utility co's.
    Reply | Link to Comment
  •  
    Oct 20 10:22 AM
    Do rush to follow. As usual, Buffett is right and the headline chasing market timers are hopelessly wrong.
    Reply | Link to Comment
  •  
    Oct 20 11:42 AM
    Huh? Poor analogy on subways...

    Check his actual purchases. Not sure you got them right. Did you account for splits and spinoffs?
    Reply | Link to Comment
  •  
    Oct 20 12:14 PM
    So, are you saying his purchases are down in 2008?

    OK, DOW is down from 14000 to 8000 in 12 months and you're singling out Buffett?

    Wow, you have a skill at pointing out the obvious.

    Go back 5 years and tell me where his purchases are today?

    Now go back 10 years and tell me where his purchases are today?

    Now go back 15 years and tell me where his purchases are today?

    Do you see the point here? It's a voting machine short term, and a weighing machine longterm.

    Do you calculate your home price daily?
    Reply | Link to Comment
  •  
    Oct 20 03:28 PM
    I cannot believe you can make such an error when you say that investors have to invest $200 Billion for GE to double or to invest $1 billion for a $1 billion market cap to double.
    A stock can double with 1% of shares changing hands or 0.1% for that matter if there is almost no one on the other side selling. So theoretically GE could double with very little new money invested and most of the share holders just holding on to their stock and enjoying the ride...
    Reply | Link to Comment
  •  
    Oct 20 03:42 PM
    Warren's GE "investment" was down $152M last week but has fought back a bit. I think this one may have been a mistake buy unless Warren got some control of what is going on at GE(why not?), as since Welch left Immelt has done nothing. Of course, the genpop knows nothing of the goodies Warren may have gotten from GE other than the 10% divvie but I am so very sure he got other things too.

    BTW, GE stock is at an 11 year low.
    Reply | Link to Comment
  •  
    Oct 20 03:43 PM
    Your choice of examples to show Buffett has lost money on his stocks is unfair - it's incomplete as you have not included when these "money-losing&quo... "recent stock purchases" were purchased.

    I'm sure anyone who's recently been buying stocks in this past year will also show their portfolios down as well - be they big-time, famous, experienced, knowledgeable investors, (i.e. Buffett, Gates, whomever) right down to Joe-the-Small-Time-Inv...
    Reply | Link to Comment
  •  
    Oct 20 04:29 PM
    Why wait to buy stocks?!

    The Federal Reserve and Treasury are pumping trillions (with a "t" and a "s") into the banks which will eventually feed into the economy sometime in late 2009. There is no way the government (or any world government) is going to let another finance company fail now knowing the devastation the Leyman failure created (the Leyman failure started this financial crisis because banks stopped trusting each other and refused to lend to each other). LIBOR is coming back down to normal levels meaning the banking system is unthawing. Governments and central banks around the world are taking aggressive action in unison to prevent further bank deterioration.

    Gasoline prices have plummeted giving almost every person and business a big “tax” cut. This will eventually give a boost to the economy becoming visible in late 2009.

    I see 2010 as a big economic recovery year because of all the extra money in the economy from “cheap” gas and the financial bailout. Stocks will anticipate this recovery sometime in 2009, if not sooner.

    Buffett is buying - he is a dogged value investor that demands a good price for quality companies before he buys. You just have to be patient like him.

    Now, sounds like "thee" time to be buying stocks. Stocks have already crashed to unreal P/E levels. Forget trying to find the absolute bottom. Set limit orders to buy at 5 to 15 percent below current levels, depending on how much you want a stock. There is a good chance you will get your price because hedge funds are still selling stocks to meet redemptions and losses, and any little “spook story” now causes weak-kneed investors to run for the door in capitulation.

    One more thing. Only 11 more days to November and we’ll be out of the notoriously bad “trick or treat” month for stocks.

    Reply | Link to Comment
  •  
    Oct 20 04:52 PM
    bobbobwhite, You base your idea that Buffett's purchase of GE may have been a mistake because the stock has sagged since he bought it about ONE MONTH ago!? A month is nothing on the Buffett timeline. He once said that people should be limited to trading stocks once a year.
    Reply | Link to Comment
  •  
    Oct 20 07:51 PM
    This article is a joke. The fact that the example 2008 purchases are nearly flat supports the exact opposite of the author's conclusion.
    Reply | Link to Comment
  •  
    Oct 20 08:04 PM
    I don't think St. Warren is not much of a day trader.
    Reply | Link to Comment
  •  
    Oct 20 08:29 PM
    devin hobbes writes a pretty bad article overall about warren buffett. i would like to see how much better devin's investments are doing compared to buffetts track record.

    the examples of putting $200 billion into GE for it to double has no accuracy whatsoever. there are other things that also dictate the price of a stock besides the amount of volume being put into the company. a good example of this is the actual fundamentals of the company and how profitable they are. volume is not everything.
    Reply | Link to Comment
  •  
    Oct 20 08:36 PM
    devin hobbes should be fired for this type of analysis.
    Reply | Link to Comment
  •  
    Oct 21 12:19 AM
    It is nonsense to suggest that investors would have to put in 200 billion dollars for GE stock price to double. Market price does not equate to how much money has been put into the stock but rather how much the market is willing to pay for the stock. If GE prospects suddenly look bright and no current holder is willing to sell for anything less that twice today's price, GE stock price can double without any significant exchange of shares.
    Reply | Link to Comment
  •  
    Oct 21 12:30 AM
    After my earlier - and 1st ever - comment on SA was published I noticed that two others had made the same comment on their first ever posts as well on SA. It is interesting that this misconception about Mr. Market caused 3 people to go through the trouble of registering in order to point this error out !
    Reply | Link to Comment
  •  
    Oct 21 01:30 AM
    What a nonsensical article. Huge surprise that's Warren's stock picks are down in a market like this. And thanks, too, for the unique advice not to jump into this market in one fell buying swoop.

    Articles like this come across mocking of someone who was trying to do something good for people and the country. Who knows when the bottom will arrive, or if we'll see an incline only to revisit the bottom in a few months. The point Buffett is making is that stocks are at very attractive prices (in relative terms) and over the next years or decades today's buyers will probably be happy with the purchase. Sounds like pretty fair advice to me.



    Reply | Link to Comment
  •  
    Oct 21 09:11 AM
    Buffett is like Jim Rogers. They are almost always early but eventually right.

    jimrogers-investments....
    Reply | Link to Comment
  •  
    Oct 21 03:49 PM
    My favourite part of his text is: "In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
    So I’ve been buying American stocks."


    You can find lots os Warren Buffett`s material in

    warrenbuffettstocks.bl.../
    Reply | Link to Comment
  •  
    Oct 22 01:14 PM
    I still have faith in many old school investors such as Warren Buffet, Sir John Templeton, John Bogle, etc. They've experienced the many highs and lows of the marketplace. In my personal opinion, they still have credibility and much to offer by way of advice and guidance.

    (Note: Sir John Templeton passed away on 07/08/2008 at the age of 95. I, along with many others, enjoyed his frequent visits to Louis Rukeyser's "Wall Street Week").
    Reply | Link to Comment
  •  
    Oct 22 03:05 PM
    You clearly do not follow Buffett purchases as many of the stocks you listed were not bought by Buffett but by Lou Simpson who runs the Geico Portfolio. NRG, WLP, etc. Anything under $500mm is most likely a Lou Simpson purchase.
    Reply | Link to Comment
  •  
    Oct 22 04:29 PM
    I'm pretty sure Buffet is fine with risking 20-40% losses in the near term if he is reasonably sure his investment will double in the next few years. He's done his homework and he doesn't ever have to sell at cheap prices if he doesn't want to. He'll just collect dividends and wait it out as always.

    Low prices are never a good reason to buy anything! If I offered you $300 for your car, would you sell, afraid that it would go even lower? No, you'd study the fundamentals of the market, realize that cars like yours are inherently worth a lot more than that, and refuse to sell, even if your neighbors were panicked by my offers sold their cars to me for $300 each.

    If only people treated investing with the same common sense that they use when they put their car on craigslist!
    Reply | Link to Comment
  •  
    Oct 22 06:53 PM
    This article would be great, except it precludes the obvious. Buffett is making money like crazy. You don't think he has spreads on his holdings? Pleaaaaaase. Duh.
    Reply | Link to Comment
  •  
    Oct 24 01:01 AM
    wow, what a surprise that Buffett has lost some money in this market. I thought he was some sort of omnipotent god, impervious to systematic risk!
    Reply | Link to Comment
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