Wednesday, June 24, 2009

Stocks Selling Below What Buffett Paid

This Wall Street Journal article mentions that JNJ, COP, KFT, USB have all been bought by Buffett in the past few years but are selling below the price he paid.

An opportunity to buy stocks below Buffett's price has not happened that often (though what this article points out has been true for over a year). They may not outperform in the short run but in the long run, if someone was looking for a guide of what to buy right now...not a bad place to start.

The article doesn't mention two other major positions that he bought in recent years also at higher prices than they are selling at today: BNI and WFC.

Stock/Buffett Paid Price/Current Price
JNJ/62/55
COP/82/41
KFT/33/25
USB/31/17
BNI/75/73
WFC/32/23

Not only did he buy these at prices higher than they are selling at today, all are major positions for Berkshire....anywhere from $ 2 billion to $ 7 billion each.

That's a lot of $'s even for Buffett. Combined the above 6 stocks make up over 40% of his current equity portfolio.

With a holding period that is typically "forever", I'm guessing he believes each of these businesses will be worth multiples of the current prices 20 years from now.

Though not everyone believes it. Recently, one of the regular guests on CNBC called Buffett an "idiot", but then backed off a bit 10 days later.

Here are excerpts of his comments from this article:

He (Dennis Gartman) scoffs at value-oriented, buy-and-hold stock investors who incurred deep losses last year. "Warren Buffett is an idiot," he said, emphatically, in a short interview after the speech. "Shame on Warren Buffett."

...but then backed off later saying the following on CNBC:

Gartman: ...I think that Mr. Buffett made some terrible mistakes last year and when you're down 45 percent for a year, I'm sorry, that's inexcusable.
Melissa (Lee): Right. OK. So maybe not an idiot but maybe some idiotic trading moves. (Laughs).
Gartman: Not an idiot. Clearly he's not. He's a genius trader ...

Some thoughts:
Buffett has never been a trader and doesn't mind if a stock trades down if the long-term prospects for the business remain strong. Many of his best long-term investments initially went down 50% before going up many thousand %. GEICO (initially he owned the stock before buying the company outright), American Express, Washington Post and, of course, Berkshire Hathaway itself are some examples.

Berkshire has been down 50% before on many occasions. A quick history. When it was selling at $ 7/share it dropped 50%...then it rallied to $ 4,300/share (~50,000% gain within 20 years). From $ 4,300/share it then dropped ~40%...then rallied to $ 82,000/share in 1998. From that $ 82,000/share level it again dropped 50% to $ 41,000/share...then rallied recently to over $ 150,000/share in 2007...then it had the 45% drop that Gartman references in his comments. So including this most recent drop Berkshire is still up roughly 1,000,000% during the past 40 years (ie a $ 10k investment grew to $ 100 million...as Puddy would say right on queue: "Yeah, that's right"). A good chunk of that return came from buying concentrated positions in what seem like boring but stable businesses and holding them a long time.

20 years ago when the Berkshire A shares were selling at $ 4,000-5,000/share people were asking how much higher can it go. Well the A shares are now selling at $ 86,000/share. Given its current size, growth will certainly slow in the future. Still, in my view it'll be much higher than its current price in 20 years for a simple reason: Most of the businesses owned by Berkshire Hathaway (both those owned outright like See's Candies or partially owned...like shares in Coca-Cola) have durable high returns on capital.

It's still a compounding machine and it's about investing...not trading.

So that's about as much time as this deserves as far as I'm concerned.

"If you're an investor, you're looking at what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game." - Warren Buffett in the 1997 Berkshire Annual Meeting

"Even though they are going to be net buyers of stocks for many years to come, they (investors) are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." - Warren Buffett in the 1997 Berkshire Hathaway Shareholder Letter

"The speed at which a business success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price." - Warren Buffett in the 1987 Berkshire Hathaway Shareholder Letter

"I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out." - Warren Buffett in 2003 talking with Wharton MBA Students

It's always possible that he messes up this time but seems just a bit unwise to bet on that outcome.

Adam

Long positions in stocks mentioned

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