Warren Buffett’s Latest Shareholder Letter Brings Out the Speculators

Photo credit: Flickr/thetaxhaven.

In his latest shareholder letter, Berkshire Hathaway CEO Warren Buffett made an interesting comment that sent the investing world into overdrive. Buffett noted that while Berkshire Hathaway's utility subsidiary MidAmerican Energy completed its $5.6 billion purchase of NV Energy last year, it "will not be MidAmerican's last major acquisition." Analysts and investors saw that comment as Buffett's proclamation that it was now open season for a new elephant-sized energy deal.

Let the speculation begin
Bloomberg was among the first to publish a list of companies that could meet Berkshire Hathaway's criteria for a possible takeover target. These included utilities Wisconsin Energy (NYSE: WEC  ) and Alliant Energy (NYSE: LNT  ) , as well as pipeline MLPs such as Plains All American Pipeline (NYSE: PAA  ) or MarkWest Energy Partners (NYSE: MWE  )

The reason investors are interesting in finding the next Buffett buy before he does is quite simple: Despite being a value investor, the Berkshire CEO still pays a premium when he buys a company. In the case of NV Energy, Berkshire Hathaway paid a 23% premium to the company's previous closing price. That quick profit is enough to entice any speculator.

Photo credit: Flickr/Steven Depolo  

Missing the point
While investors scramble to paint targets on companies Buffett might be interested in, they are really missing the point as to why he could be eying a new buy in the first place. Buffett is not looking to make a quick buck, he's in it for the long haul. He has said repeatedly that he just loves buying a good business at a fair price and then holding onto it.

Investors, therefore, shouldn't look at Wisconsin Energy as a get rich quick idea on a possible Buffett acquisition. Instead, investors should see the 14% return on equity the company earned this past year and its well-respected management team as a reason to hold shares for the long term. The same would go for Alliant Energy's expanding renewable portfolio and the fact that the company operates in a favorable regulatory environment. Instead of speculating that Buffett might buy, investors should follow his teachings and apply them to a long-term commitment to being an owner of a company such as Alliant.

The same can be said for MLPs such as MarkWest or Plains All American. Both companies are well positioned to grow as key logistical partners in America's energy boom. Plains, for example, is a great way to invest in the long-term growth of the transport of oil by rail. While it doesn't own the rail lines like Berkshire Hathaway, Plains does own 23 crude oil and natural gas liquids rail loading and unloading facilities, as well as 5,400 railcars. It also has strong visible organic growth that stretches for the next several years.

Photo credit: MarkWest Energy Partners.

MarkWest likewise has strong visible growth. The company is a leading midstream operator in the rapidly growing Marcellus shale and Utica shale regions. MarkWest has 17 projects under construction in both areas, which are critical to supporting the development of those two shale plays. Because of this the company sees long-term distribution growth of more than 10% annually as these projects come online. While a quick profit from a Berkshire buyout would be nice, the company is building a real compounding machine that investors might not want Buffett to take away from them.

Final thoughts
Some investors read the annual Berkshire Hathaway letter for clues as to what he'll buy next in hopes of buying stocks ahead of a Buffett bounce. While that's one way to make money, it's not the Buffett way. As he has shown for decades, the real way to make money in the market is to buy great businesses at fair prices and hold them for the long term.

Learn more of Buffett's great wisdom
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

 


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