3 Things to Remember About Buffett's Buying Spree

In 2001, Warren Buffett told Fortune magazine that stocks would look attractive if the total market capitalization of all U.S. equities dipped below 80% of gross national product. In August, that's exactly what happened. Sure enough, Berkshire Hathaway (NYSE: BRK-B  ) spent more money buying stocks in the third quarter than it has in at least 15 years. Don't you love when people put their money where their mouth is?

Berkshire invested about $24 billion last quarter. Of that amount, $9 billion went toward the purchase of Lubrizol, and $5 billion went toward the preferred-stock investment in Bank of America (NYSE: BAC  ) . Roughly $7 billion was invested into an unknown medley of stocks in the "commercial, industrial and other" category.

What should you make of it? Here are three things to keep in mind.

1. Buffett doesn't call bottoms. Anything could happen from here.
One of the best stories about Buffett buying stocks is his experience with The Washington Post Co. (NYSE: WPO  ) . As Andy Kilpatrick explained in his book Of Permanent Value:

After Buffett's purchase, the stock fell for the next two years, and Buffett's investment sank from $10 million in 1973 to $8 million in 1974. Post Co. stock did not move solidly ahead of Buffett's purchase price until 1976. Now the stake is worth more than $1 billion.

That's incredible when you think about it. Washington Post stock fell 20% and sat there for years after Buffett bought it, and it ended up being one of the best investments Berkshire ever made.

Buffett isn't concerned about timing bottoms, and his latest buys are no different. I don't think it would bother him one bit if stocks fell considerably from his recent buy prices. The goal is to buy good companies at good prices and hold them for as long as possible. What happens in the short run is irrelevant -- and for Buffett, the short run can be several years.

Too many forget that when analyzing his moves. In October 2008, Buffett wrote an op-ed in The New York Times. "I've been buying American stocks," he wrote. "If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

Stocks fell another 33% after the article was published. Some poked fun. Bad timing, they said. "Warren Buffett loses his Midas touch as shares drop," read one headline in early 2009.

But was it a bad move? Three years later, the S&P 500 is up about 30% from the day his op-ed was published. Ten or 20 years from now, the buys are likely to look even more prescient. It all comes down to your time frame.

2. It may not have even been Buffett doing the buying.
Berkshire Vice Chairman Charlie Munger once noted that one of the keys to Berkshire's success is its "extreme centralization" of capital deployment. He and Buffett are the only ones pulling the trigger.

But that's changing. To prepare for succession, Buffett hired two money managers -- Todd Combs and Ted Weschler -- to manager a chunk of Berkshire's money, estimated at up to $3 billion each.

"I wonder if he turned Todd Combs loose," one investor told Bloomberg about Berkshire's recent buys. "I hope Buffett went to the movies one day and Combs got on the phone and went crazy with buy orders."

Until more details come out, there's no way of knowing how much of Berkshire's third-quarter purchases came from Combs and Weschler. It could have been none, or it could have been most. SEC filings due out in the next few weeks should provide some clue. In general, individual purchases of less than $1 billion likely came from Combs or Weschler. In previous quarters, Combs opened stakes in MasterCard (NYSE: MA  ) and Dollar General (NYSE: DG  ) . Stay tuned.

3. This is why Buffett is rich.
Think about how ugly things were during the quarter Berkshire went on a buying spree:

  • The U.S. came within hours of defaulting on its debt for the first time in history.
  • U.S. debt lost its AAA credit rating for the first time in history.
  • Europe marched toward a potentially devastating financial crisis.
  • Several reputable economic metrics began pointing to a looming recession.

And Buffett backed up the truck.

"The cheaper stocks get, the better I like to buy them," he said in September.

Ideally, most investors try to follow that philosophy. In reality, few do. That Buffett actually buys when there's blood in the streets -- rather than saying it when times are good and then retreating into panic when things get ugly -- goes a long way to explaining why he's rich.  

"What is likely ... is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," he wrote in his 2008 op-ed. "So if you wait for the robins, spring will be over."                       

Wise advice -- that few will follow.

Interested in more like this? I've just published a collection of short essays exploring the peculiar corners of the economy -- from rich people risking it all to gain money they don't need, to what investors should have learned after 9/11. Click here to download it on your Kindle or iPad. It's the best $1 you'll spend all year.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway and B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway, Bank of America, and MasterCard. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (89)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2011, at 5:50 PM, DoctorLewis4 wrote:

    Good article. Buffett is playing chess while others play checkers.

  • Report this Comment On November 10, 2011, at 7:17 PM, Waltermouse wrote:

    Warren Buffet is so rich he can afford to wait out the years, knowing that even if he loses it all, he won't have trouble buying his next new car. Most of us run a little closer to the bottom than that, so don't be surprised if gut-wrenching market drops unnerve us!

  • Report this Comment On November 10, 2011, at 8:38 PM, dmvcal wrote:

    Not QUITE. Take a closer look @ Buffet's Goldman-type buy into BAC. Same Buffet who strongly favored TARP give-away, since that helped cushion his GS (sweetheart) play.

  • Report this Comment On November 10, 2011, at 9:39 PM, DaiEvans1955 wrote:

    Buffet is clearly a master of his art.

    Sadly, dmvcal, would prefer to extrapolate from the one datapoint that supports his beliefs rather than look at the complete picture.

    Waltermouse seems to have missed the Fool ethos - the Foolish invest for the long term, so we too should be willing to "wait out the years"

  • Report this Comment On November 12, 2011, at 1:00 PM, DividendsBoom wrote:

    I wonder how many BAC type opportunities their will be in the future. Between GS, GE, and BAC the possibilities have been make good money, or make great money

  • Report this Comment On November 14, 2011, at 10:37 PM, lowmaple wrote:

    If you manage you finances and keep a rainy day fund prudent investing can be had by anyone who is not destitute unless a meteor strikes you.

  • Report this Comment On November 14, 2011, at 10:48 PM, rdub76 wrote:

    Here's the problem with trying to follow warren Buffet. You're not Warren Buffet.

  • Report this Comment On November 17, 2011, at 4:02 PM, FoolyOut wrote:

    Walter, he started out w/nada and he's told his "secrets" to anyone who's asked. he says he has no secrets, he has reading reports and patience. WE ALL could use a lesson in patience. Each person whose followed his advice and his example has had similar results (barring some calamity) commeasurate to how long they've been doing it. It's too simple for some to believe. Others simply aren't disciplined enough, but it's not rocket science. It's doing a specific set of things, in order, over and over and over and over. Few have the patience and discipline for such monotony.

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