Friday, August 17, 2007

Global Market Meltdown: What is Warren Buffett Doing?

As we approach Global Stock Markets, the volatility that surrounds them can create opportunities for making a purchase rather than a reason to sell.

I am reminded of what Warren Buffett looks for when buying companies and the cheaper share prices that we are now experiencing are making one of Buffett's tenants of investing more focused as the markets get lower:

His investment criteria included companies with "good returns on equity", little or no debt, "simple" businesses that he could understand, and consistent earnings, Mr Buffett said in his latest annual report. (Warren Buffett 2007 Berkshire Hathaway Annual Report)

Sure , Buffett is talking about companies that he buys having a good return on equity as an operating business. As an investor in cheaper shares though one can use falling share values to buy good companies and as an investor make better returns on your "bargain" purchase therefore making your returns all that much better.


Buffett has been hoarding his cash like your grandma over the last few years and many potential targets would have revealed themselves over the last few weeks of turmoil:

Warren Buffett says the current market chaos and turmoil will probably create buying opportunities for him and Berkshire Hathaway:
"You get more excited when there's a lot going on, you can't help it. And frankly, it will probably present more opportunity to us because when dislocations occur things get more mispriced and that sort of thing...
"So it can be a time of opportunity. It won't be for sure, but generally speaking, when there's a certain amount of chaos in certain sections, the fallout, and its unpredictable where the fallout will be, but the fallout sometimes offers some real opportunities."
(CNBC Aug 15 2007)

Shares of health insurers, steel makers and department stores are down by as much as 18 per cent than they were in May, when Buffett said he would "figure out a way" to raise up to $US60 billion for the right deal. WellPoint Inc, Nucor Corp, Kohl's Corp and dozens more companies are now closer to meeting his investment criteria.

He has disclosed purchases a few days ago that his company has bought a new stake in Bank Of America and increased his stakes in Wells Fargo and Bancorp in the last quarters SEC filings.

As these companies have been beaten down over recent times you might expect the Sage of Omaha to be sniffing around them again.

Warren Buffett's history shows that he has done well during market turmoils as he tends to be doing the opposite to everyone else.

He bought beaten down stocks during the 1970s bear market lull and it paid off handsomely as the 1980s began a bull market not seen since the likes of the 1920s. His mentor Benjamin Graham made money off the 1930s bear market by doing exactly the same thing.

I guess we just have to learn from history. Markets have always had these volatile "corrections". Currently most investors seem gripped in the fear mode and it looks unlikely that the slide will be ended until some certainty comes back to the market.

Buffett and his mentor Benjamin Graham were able to ride these market blowouts and actually make it a positive. Their history and reputations as value investors are largely made during these times of turmoil.

Take a lesson from Warren. Keep cool, keep your head, keep your shares(if they were good ones to begin with!) and look for the bargains that will come.

c Share Investor 2007