Why Won't Buffett Decide?

Warren Buffett, the investor so loyal and so focused that he once pledged not to sell his stake in Washington Post (NYSE: WPO  ) , can't decide whom to back in the 2008 presidential race: Hillary Rodham Clinton or Barack Obama.

Here's how he put it recently after attending a San Francisco fundraiser for the junior senator from New York: "I told both of them that if they ran for president I'd support them, and here we are."

No surprises there. Buffett never decides before he has to. And sometimes he doesn't decide at all.

The brief history of a brilliant investor
More on that in a minute. First, an overview. My limited study of Buffett the investor reveals two things:

  1. He often buys cheap dividend payers.
  2. He believes diversification is overrated.

Yes, I know, all hail the master of the obvious.

Here's my point: For Buffett, eschewing diversification isn't necessarily reflected in a concentrated portfolio. Berkshire Hathaway owns dozens of stocks. What I find interesting is that, if you study those stocks, you'll find that Buffett has no problem owning multiple businesses in the same industry:

Industry

Companies

Railroads

Burlington Northern (NYSE:BNI), Norfolk Southern (NYSE:NSC)

Banks

Bank of America (NYSE:BAC), M&T Bank (NYSE:MTB)

Source: SEC filings.

That is, he won't decide.

But why should he? Yes, I know Clinton and Obama cannot both win, and that's not true when it comes to railroads and banks. Both sectors are unfairly beaten down and both are very likely to stage a comeback. Buffett is amplifying his potential returns by betting on the best operators within these industries.

Decide to crush the market
He's not alone. Here's what Tom Gardner wrote in the introduction to the August 2002 issue of Motley Fool Stock Advisor:

For many down-and-out companies, the market won't let up, and even mediocre companies don't offer great value. But for the companies that keep generating cash, the current "sell-at-any-price" environment offers investors some rare discounts. That's important to remember. When the market is down, it's not just a difficult time we have to get through. It's also a wonderful opportunity to take advantage of the beaten-down prices of some good companies.

Notice the plural.

Tom has since been a careful student of his own advice, buying the best stocks in beaten-down industries such as insurance. Brother David, meanwhile, seeks mispriced growers in industries with appealing economics. Video games, for example. His side of the Stock Advisor ledger still includes gaming specialists Electronic Arts (Nasdaq: ERTS  ) and GameStop (NYSE: GME  ) .

The brothers Fool are borrowing from the master -- the one who may as well have invented the idea of betting on the best players in beaten-down industries.

Interested in getting rich? Steal from Buffett. Take an unloved industry you know and rank the top businesses within. Read all the financial statements. Ask questions on our discussion boards. Then, when you're confident that you know what you're buying, put your cash into the real bargains; the stocks that can make you wealthy.

And don't ever let anyone tell you to decide when it comes to stock picking. Even though Buffett and his partner Charlie Munger have preached concentration instead of diversification, it's clear they also make top-down investment decisions -- and they're both a lot richer than you or me.

GameStop, a seven-bagger, is one of the best-ever picks David Gardner has made in Stock Advisor. Electronic Arts has also been a market-beater for the service, as has Berkshire Hathaway. Get the inside scoop on all the stocks in the portfolio with a 30-day free trial to Stock Advisor. There's no obligation to subscribe.

Fool contributor Tim Beyers owned shares of Berkshire Hathaway at the time of publication. The Motley Fool also owns shares of Berkshire Hathaway; it's an Inside Value pick. Bank of America is an Income Investor recommendation. The Motley Fool's disclosure policy decided to go with twinkly lights on its 12-foot tree this Christmas.


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