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Why Is Everybody Selling as Buffett Is Loading Up?

by: Stone Fox Capital October 06, 2008 | about stocks: BRK.A / BRK.B / CEG / GE / GS / WFC    

Stone Fox Capital

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It intrigues me when the greatest investor of our times has been on a buying spree and yet the markets have just had the worst week in 7 years per CNBC. Guess the herd mentality in the financial markets continues to live strong. After all, we're just now coming off commodity and real estate bubbles. Why not have an overdone stock market sell-off?

Below are the highlights of the recent Buffett purchases:

  • 9/19: MidAmerican Energy and Constellation Energy (CEG) reached a definitive merger agreement in which MidAmerican will purchase all of the outstanding shares of Constellation Energy for a cash consideration of approximately $4.7 billion, or $26.50 per share. Berkshire Hathaway (BRK.A) owns 87.4% of MidAmerican.
  • 9/23: Berkshire Hathaway is paying $5 billion for Goldman Sachs (GS) preferred shares that pay a 10% dividend. Berkshire also gets the right to pay $5 billion more in Goldman common shares at $115 each.
  • 9/29: MidAmerican Energy today announced it has agreed to purchase 225 million shares, representing approximately a 10 percent interest, in BYD Company Limited (1211.hk). The investment is valued at 1.8 billion HK dollars, or approximately $230 million U.S. dollars.
  • 10/1: Berkshire Hathaway agreed to buy $3 billion of preferred General Electric (GE) stock. This stock pays a generous dividend of 10%. On top of that, Berkshire gets the option to buy $3 billion of GE common stock at $22.25 per share, well under the current trading price of around $25 a share.
  • 10/3: Wells Fargo (WFC) said early Friday that it would pay 0.1991 of a share of common stock in exchange for each common share of Wachovia Bank (WB) in a deal worth $15B. Berkshire Hathaway is the largest shareholder of WFC.

That's a whopping potential for over $30B in deals with up to $16B in cash.

News by Bloomberg of the worst month ever for hedge funds in September might be a big reason for such a negative market this last week. As those redemptions come in the market might have faced a lot of forced selling this week. After all, we know the rescue plan passed on Friday should've been net positive to the market. Friday's action after the passage in the House smelled of desperate hedge funds attempting to sell at the best valuation they could get prior to redemption payments.

Buffett may have been early in the market, but I'll be surprised to see him down much on any of his investments. Of course, his cash deals with GE and GS were clearly better deals than any small investor could get, but it's hard to see why anybody would be a net seller when Buffett has gone on a widespread buying spree. Heck, Buffett has even come out on more than one occasion and stated that the rescue bill approved on Friday would likely be profitable to the government. Yet, most taxpayers are overwhelmingly negative on the bill.

As he is famous for saying:

Be fearful when everybody is greedy and greedy when everybody is fearful.

Everybody is fearful right now.

Disclosure: None

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This article has 31 comments:

  •  
    Oct 06 05:10 AM
    Buffet bought Goldman and GE preferred with a hefty dividend. If he had bought the common it would be a buy signal
    Reply
  •  
    Oct 06 05:30 AM
    Rokjok777, good point. However, if Buffet thinks the bottom is still ahead, why doesn't he wait further so he can get even better deal, since GS and GE will be even more desperate by that time?
    Reply
  •  
    Oct 06 05:43 AM
    he is a bargain hunter -also he is well aware GE and Goldman are under the to big to fail list -and Paulson probably gave a secret guarantee that goldman will profit from his low oversight when he starts dishing out checks for billions of dollars - what you dont see is Buffet running into regional banks - as for the energy companies the bailout has an alternative energy clause in it to give the industry a lot of money maybe these companies are on the list
    Reply
  •  
    Oct 06 08:13 AM
    Preferred stock with a possibility to buy the same amount at same price in so many years... If things get bad he will be paid first you wont !
    everyone knows that it is a nice deal for WB.
    Reply
  •  
    Oct 06 08:18 AM
    Maybe if the rest of us could get such a good deal, we might load up also. 10% preferred with warrants attached is certainly a better deal than is normally available to plebian shareholders.
    Reply
  •  
    Oct 06 08:54 AM
    Buffet can afford to wait...but he could be early and wrong this time around...consider his previous over-weight allocation in insurance.
    Sure he'll get a 10% dividend on his preferred shares..IF..Goldman and GE don't have future problems. Nothing is sacred in this atmosphere..even Buffet.
    Reply
  •  
    Oct 06 09:04 AM
    birder: BRK-B is $4650 a share. Plebian shareholders can get such a good deal. Half my portfolio is BRK-B, and it is on track or ahead of schedule for a compounded 10.7% annual return for the last five years.

    Buffett takes a mere $100,000 annual salary and no stock options or anything else. 99.99999% of his billions comes from his share of Berkshire. BRK-B is directly tied to the price of BRK-A (1/30th of a share of BRK-A). That means his interests are directly aligned with those of his shareholders, he doesn't make any money unless you do.

    So the average shareholder can indeed get exactly the same deal as Buffett, he uses the power of bulk buying and big deals to benefit all of us. I think it is hilarious how many pundits out there are constantly telling us how to invest like Buffett, or what the next Berkshire Hathaway is, when the original is still available and still delivering exactly what he has always delivered; the best business analysis, investment and negotiation brain on the planet.
    Reply
  •  
    Oct 06 09:58 AM
    If warren,or some other entity owned all the gold in the world;
    what would they do with it? seems to me like the only buyer's then would be
    the people creating something with it. Does anyone consider this a worthy observation?
    Reply
  •  
    Oct 06 10:08 AM
    That Buffet has entered the market means that he sees this as a time of extream fear and thus a time to buy. He of course has bargaining power to get the better deals and you can access those through investing in BRK. My view is that this is the one quasi financial services company which must make up a significant part of any long term investors allocation to the financial services sector.

    That BRK has invested in GS & GE is buy no means an all clear to buy those entities. He has driven a hard bargain which individual investors are not eligible for. An equivalent deal might emerge if share price of GE/GS falls 20% below the options price. In looking at GS/GE as investment opportunities you need to consider liquidity & solvency risks (which in my view are low particularly because of the BRK investment); then you have to look at valuation (could get better - and do not presently cover the risk specially since I expect dividend cuts/elimination).
    Reply
  •  
    Oct 06 10:15 AM
    In this market mayhem, our readers have been holding QID since Sep 3rd and it has gained 45% in the past one month.
    Reply
  •  
    Oct 06 10:18 AM
    Yes, Buffett's purchases of other companies is encouraging, and John Templeton also encouraged investors to buy when there is blood in the streets, which is certainly the case now. But you skirt over the fact that with GE and GS, he got terms that are unavailable to holders of common stock. He has an instrument that yields 2x the GE common and 10x the GS common; due to the 100% warrant coverage, he has all the upside of the common holders; and due to the liquidation provisions, he loses only in the event of an utter failure of the company. GE's current market cap is $225 billion; for a new buyer of common to break even, the market cap must remain at $225 billion; for Buffett to break even, he just needs there to be $3 billion available (plus the value of any other preferred with equal or greater priority) after the Company is liquidated and debts are paid. So Buffett is safe so long as GE can maintain at least 1.5% of its current market cap. A rather shallow vote of confidence.

    www.findingdulcinea.co...
    Reply
  •  
    Oct 06 11:48 AM
    Because he's smarter than us.
    Reply
  •  
    Oct 06 12:39 PM
    silly article.if all could get these deals others would be buying
    Reply
  •  
    Oct 06 01:20 PM
    Sure he got better deals then us in the case of GE and GS, but he didn't get a better deal in the case of WB. He actually had to outbid C. The real issue though is that he didn't have to do these deals. Why didn't he wait? and why should you if he didn't?
    Reply
  •  
    Oct 07 02:50 AM
    Regarding the bail out Buffet certainly seemed in a panic. I think Buffett is way early here. Markets will continue to tank for next month of so. I think when we are 50% from market peak we could see some stablization. The market might actually be a good value. But we need the crisis to pass. Furthermore I don't expect it to go up fast. Lots of bad future earnings in the way.

    Reply
  •  
    Oct 07 08:24 AM
    notsosmart - no you wouldn't.

    I've been buying - moved 10% from short term bonds to stock yesterday. Calling bottoms is a fools errand, can't be done. Proof - you see any owner of the world who made it all calling bottoms? But calling levels is easy. Holding long term is easy. Dollar cost averaging is easy.
    Reply
  •  
    Oct 07 10:10 AM
    I agree with the observation that Buffet is getting a sweetheart deal. I'm sure if GS or GE offered those same preferreds on the open market, they would attract billions in investment. You can bet I'd buy them. The thing is, that listing process could take months - time these companies didn't have.

    This is a story of how cash in hand negotiates better than promises. Buffet came to these companies with a wad of billions in his hand and said "I can save you tomorrow, not a month from now." They were desperate. Buffet's option was the only thing that would keep them afloat, so they had to take it.

    This cash-in-hand leverage, and Buffet's tendancy to buy entire corporations, explains most of his recent outperformance.

    As TonyC-SA points out, individual investors can't get these deals unless they buy Berkshire.
    Reply
  •  
    Oct 07 11:11 AM
    Comments are from negative losers who are standing around frightened.
    Reply
  •  
    Oct 07 11:15 AM
    1. there's no safe stock.
    2. there's no safe time to buy any stock.
    3. if you are looking for safety, skip stocks altogether.
    4. market has never reward cowards.
    5. market rewards people who can think and have courage to execute.
    Reply
  •  
    Oct 07 11:20 AM
    How about because Buffet is diluting everyone else? Is it that hard to see?? Why in hell would I wanna go into GS or GE now, after they've agreed to issue him that much preferred at 10%?? They're gonna have a hard time making 10% for anyone else and he's gonna come away with the lion's share of the earnings.
    Reply
  •  
    Oct 07 12:48 PM
    Nice pufff piece on Buffett, sure he's a good investor but now he's also a "media hog" going on every TV show to announce how he's investing. Playing the part of "awh shucks" good ol country boy. The posturing for the media was embarrasing to watch especially for a man of his stature.
    gato
    Reply
  •  
    Oct 07 02:18 PM
    Continues to be telling that most of the comments are very negative. Hmm
    Reply
  •  
    Oct 07 02:29 PM
    So I guess Warren was a little bit early on this sale, but he got the market right. It's all about price and no one can predict a top or a bottom. Those who have long term staying power and make wise decisions based on value, always make money.


    BUFFETT IS WAY WRONG AT HOME
    By SUZANNE MCGEE
    PrintEmailDigg ItStory Bottom

    November 5, 2006 -- Even Warren Buffett gets it wrong sometimes.

    The Oracle of Omaha's take on a real estate deal, for example, was 100 percent wrong, said the buyer of the property, because the billionaire forgot one of his core rules: Invest only in what you understand.

    The buyer, Richard Manchester, was ridiculed by Buffett after the billionaire sold Manchester his oceanfront Laguna Beach house last year for $3.5 million.

    Buffett, reducing the sale to an absurd term - $60 million an acre - told a Berkshire Hathaway annual meeting that Manchester was foolish to pay such a high price, especially since Buffettt had paid just $1 million for it nine years earlier.

    Buffett told the 20,000 shareholders at the meeting that the house, in the exclusive Emerald Bay neighborhood, had a replacement value of $500,000, and that the purchase price reflected a real estate market that has gotten out of whack.

    Manchester fell in love with the house and put in a bid even before the "For Sale" sign went up. He invested a "few hundred thousand dollars" to improve the kitchen, bathroom and other areas. Then he sold it nine months later for $5.45 million.

    "The fact that he is Warren Buffett doesn't mean he's going to be dead right on everything," said Manchester, speaking expansively about the deal for the first time.

    Manchester is a tax lawyer and financial planner who oversees about $50 million in assets.

    Reply
  •  
    Oct 07 04:47 PM
    Exactly. He's evidently early on a few of his purchases of late, but he'll get the market right. He got a steal on all these deals and 5 years from now we'll be talking about how smart he was to buy these at the lows.
    Reply
  •  
    Oct 07 06:01 PM
    Can't get a deal like Buffet? What's wrong with Citibank Preferred at 11-13% yields? Don't you think Citibank is too big to fail. Buffets warrants in GE are alredy underwater
    Reply
  •  
    Oct 08 02:32 AM
    Most talk. Warren walks.
    Reply
  •  
    Oct 08 08:52 AM
    If I could get the deals that Warren has, I would invest too. Unfortunately, I don't have billions sitting around in my mattresses.

    This capital enables him to get extremely good deals--at the front of the line in terms of preferred shares, earning interest at rates unheard of for the "common man," and having an option to buy stocks below at or below current market prices when the long-term expectation (& Warren's only concern) is that they will go up.

    About the only way I can get that deal is to invest in BRK!
    Reply
  •  
    Oct 08 12:27 PM
    Right now, you can buy his investments for less then what he paid. What do you mean you can't get his deals?
    Reply
  •  
    Oct 08 01:50 PM
    Hmm...ex-Goldman Sachs CEO creates $700 billion plan to buy securities...Buffett enters sweetheart deal with Goldman Sachs...

    What is $5 billion to Buffett anyway? The two deals are about 5% of his company. He bought CEG after it collpased. The electric battery company is interesting, but again, $230 million. Peanuts.
    Reply
  •  
    Oct 09 12:16 AM
    I have learned a lot from Warren over the last 25 years, perhaps more than any other source. He is one of my favorite influences, but no one is right all the time. There have been periods in the past where he has performed very poorly. I agree with most of the posters here that if we could these special deals it would be a much more compelling time to buy.

    What a lot of people are not getting (fortunately more and more are everyday as evidenced by public reaction to the bailout) is that what we have going on here is something that our elected officials and the fed have created over a very long period of time. It will take a long time to correct as well. This chaos that just really started to gain traction in the last month is just getting started. The bailout and massive printing of money by the Fed is only going to prolong the pain and drag this thing out.

    This time Warren's a little early. He may have the money to weather it, but I'd rather buy at 50% less than he bought.



    Reply
  •  
    Oct 15 06:40 PM
    Warren Bufett is on the buying spree because he don't care if he lost on this company to start with but overall, he make profit by the billions so all losses are tax deductible instead of paying taxes to the government. If the bail plan started, all this company that he acquired will start making money and then he will move some of his capital gain to another struggling company. This way, he will not paying too much taxes. Warren Buffett is the top investor in stocks and I trust him, he will make money.
    Reply
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