Buffett Bludgeoned? Yeah, Right.

I read a provocative headline the other day: "Warren Buffett Bludgeoned."

Hmm ... OK. It was referring to the recent purchases by the Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) chairman of shares of General Electric (NYSE: GE  ) and Goldman Sachs (NYSE: GS  ) , to the tune of several billion dollars' worth each.

The article pointed out that both stocks have dropped considerably recently. Well, yeah, that's true. Buffett's planned purchase of GE was announced on Oct. 1. The stock closed at $24.50 that day. The stock did indeed sink after that, closing at $19 on Oct. 9. But on the 10th, the day I read that headline, it rose 13%, to $21.50. Meanwhile, Goldman shares closed around $125 per share on the day Buffett's investment was announced. As of yesterday, they were at $111, down over 10%. Ouch!

But let's remember a few things, shall we? For starters, although we'll hear now and then that Buffett has invested in this company or that -- Berkshire owns shares of Procter & Gamble (NYSE: PG  ) , Wells Fargo (NYSE: WFC  ) , and Coca-Cola (NYSE: KO  ) , among many others -- we rarely hear the exact prices or dates on which he made his purchases. He's likely to buy over a period of a few days, if not a few weeks, because he's dealing with such high numbers. If someone tried to buy $500 million or $1 billion worth of stock in a company in a single day, it would get noticed and it would drive up the price.

More importantly, Buffett wasn't buying ordinary common stock. He negotiated a better deal -- shares of preferred stock that pay solid 10% dividends.

And finally: You can't fault him for missing the perfect price. How can he, or anyone, know that a $125 stock will trade below $100 for a little while soon thereafter? We can't. That involves a short-term guess, and nothing more. What Buffett does do, and does well, is gauge the intrinsic value of a company, and invest in it at prices well below that. There's no need to call him bludgeoned -- what matters is his performance over the long haul, over the lives of these investments, which may be many years.

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Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway, General Electric, and Coca-Cola. Coca-Cola and Berkshire Hathaway are Motley Fool Inside Value selections. Berkshire Hathaway is a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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  • Report this Comment On October 14, 2008, at 12:44 PM, garylangbaum wrote:

    I think even Buffett has forgotten his investment principals. He always says he wants to buy companies when he understands what they do. Are we to believe that he actually knows what GE does? Its own management seems to be unclear what it does or how well its business units are doing. And, as for Goldman Sachs, we know they do better than other investment firms but does he actually know how they operate? Clearly, he didn't learn his lesson from his ownership of Solomon Bros cause if he did, he would have skipped this one. Maybe, he was just trying to emulate JP Morgan when he stepped up and stopped the market panic in 1929?

  • Report this Comment On October 14, 2008, at 2:25 PM, JWG510 wrote:

    If you happen to think Buffett made a bad move or has forgotten his investment principles.... you probably don't know enough to be stating your opinion.

    1) Buffett straight stole from GS and GE. No, I don't mean he did something unethical, but he basically sold water to survivors of a plane wreck that crashed into a desert.

    2) He basically bought converts with 10% interest payments with half-a-decade-ish term basically at an at-the-money conversion price.

    3) Other investors who participated in the secondary offerings basically bought stock at a discount. In comparison, Buffett basically is receiving an additional 10% interest payments + at-the-money put options (I know, I know, the warrants are not 1-for-1 proportion to the preferreds, but just trying to make a point)

    4) Buffett knows enough about each business. You don't think he has people on the team who has worked with and at both? He also runs a financial/insurance company. He knows what he's talking about. He also knows it has risks.

    He is making a killing. I would LOVE to get a piece of his deals. Too bad normal investors (or even other institutions) can't get his terms.

  • Report this Comment On October 14, 2008, at 3:29 PM, dividendgrowth wrote:

    Yeah, Buffett is a classic vulture investor. Those deals with GE and GS are just shy of blackmails. Now that the US government is FOLLOWING his lead, he is going to earn $800 million a year risk free and still have the option to convert into common if things turn for the better.

  • Report this Comment On October 14, 2008, at 4:25 PM, sarcastro999 wrote:

    Everyone LLLLOOOVES to write about how great Buffett is, and no one more so than Motley Fool. Oh, he's so folksy. He made his billions starting out from a lemonde stand. NO! He was the son of a congressman who inheritted millions! I don't get it. Furthermore, this is the same guy who said that the worst was behind us back in March- a fact conveniently overlooked by WB's fawning financial media friends- and the same guy who just put a TON of money in these financials that NOBODY understands! His stock is off 20% from its highs, and he got clobbered in the recent crash. Not that he's alone, but those who understood the true nature of what's going on are positioned far better- people like Meredith Whitney, Bill Fleckenstein, David Tice, and Peter Schiff. I'll take one of those people over four Warren Buffetts any day.

    And by the way, if I here one more pundit saying the bailout must be a good idea since Warren Buffett supports it, I'm throwing my TV out the window. Of COURSE he supports it, you sycophants- without the government taking our money, all his recents deals are toast. (They're probably gonna be toast anyway...)

  • Report this Comment On October 15, 2008, at 4:45 AM, asegrist wrote:

    What about solid canadian companies, such as Manulife? Financials will always remain a core component, and I'd like to see if Buffett is making any major moves. Any thoughts on the best place to see BRK's most current holdings in the insurance sector?

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