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.

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