I guess it shouldn't come as a surprise that the Berkshire boys, Warren Buffett and Charlie Munger, saw the housing mess coming before the rest of us had cottoned to it. Indeed, their amazing prescience may be the biggest reason why Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) has been such a tremendous year-in and year-out success.
Back in May 2005, before the now-raging housing mess had become apparent, the pair discussed the subject during a question-and-answer session at Berkshire's annual meeting. As Buffett said, "Certainly at the high end of the real estate market ... you've seen extraordinary movement. ... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."
Clearly, the bulging cost-price imbalance that Buffett referred to was the death knell for housing economics as we've known them and the ensuing avalanche of subprime problems. As long as prices were outrunning costs, even predatory lending to folks who shouldn't have been able to finance dollhouses wasn't a problem.
But when the music stopped and prices began to retreat back to the level of costs, all manner of mortgagees, mortgagers, and speculators were in trouble. They quickly discovered that they'd walked off a cliff but were still trudging along, with no support beneath them.
I, too, like to invest in solid companies in areas I understand. And given Warren's demonstrated wisdom, I'm inclined to consider carefully the names "The Oracle" finds attractive, especially because it's possible to copy Warren Buffett and beat the pros. Take a look at some of his current investments:
- The rails. Much has been made of Berkshire's big positions in Burlington Northern Santa Fe (NYSE: BNI ) , Norfolk Southern (NYSE: NSC ) , and Union Pacific (NYSE: UNP ) . Given a world in which diesel prices just hit a record high, and in which shipping to the U.S. West Coast from all around the world is also on the rise, Berkshire's attention to the rails makes awfully good sense.
- Procter & Gamble (NYSE: PG ) . This is the consummate large-cap manufacturer of health and beauty products, an area that also makes terrific sense amid today's roller-coaster market.
- Coke time. Berkshire is a major holder of Coca-Cola (NYSE: KO ) , whose board of directors also includes a Mr. W. Buffett. I like Coke for its international presence; besides, it'd take an awfully deep recession for folks to stop guzzling their Cokes.
Yes, the Berkshire boys are amazingly forward-thinking. Therefore, it seems sensible to monitor the thinking at their company as closely as possible, even if one chooses to cast one's investment fortune elsewhere.
For related Foolishness:
- WWBB: What Would Buffett Buy?
- News Flash: Academics Prove Buffett Talented Investor!
- Warren Buffett Invests Like a Girl
On May 2, Motley Fool advisors Bill Mann, Seth Jayson, and Philip Durell head to Omaha, Neb., to represent you at the 43rd annual Berkshire Hathaway annual meeting. Be the first to hear their expert take on each day's events, including Warren Buffett's outlook on his favorite industries, companies, and the U.S. economy. Simply sign up below. It's free, and there's no obligation.