There's no denying Warren Buffett is the greatest living investor. Berkshire Hathaway has generated better than 20% compounded annual returns since 1965. Although Buffett's performance in recent years has been well below that (about 8% a year over the past five years), it's his consistency over time that has attracted legions of investors to follow him.
Yet the Oracle of Omaha doesn't always practice what he preaches. He has famously derided investments in both airlines and railroads as losing bets, but has bought stocks in both industries. He called derivatives "weapons of financial mass destruction," but invested in them anyway. Securities regulators also extend to Buffett special market privileges, such as not reporting trades in a timely manner, that are unavailable to smaller investors (other billionaires, though, are also given such inside access).
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Buffett is most known for his belief in buy-and-hold investing (he once said "the best time to sell is never"). Yet his purchase of a huge tranche of Activision Blizzard (ATVI +0.00%) stock earlier this year after Microsoft agreed to purchase the video game giant is once again an example of his "do as I say, not as I do" approach to investing.
So let's see why the Oracle loves Activision so much that he's willing to break another of his investing maxims to buy it.
It's game on
Let's start off by acknowledging Buffett actually first bought shares of Activision Blizzard in the fourth quarter of 2021, months before Microsoft said it was acquiring the company. He had taken a $1.1 billion stake in the video game stock, a relatively small position by Berkshire standards, that would be on par with his holdings in Amazon in terms of what percentage of the portfolio it represented (around 0.4%).
Yet when he revealed at Berkshire's annual shareholder's meeting that he had upped that stake to $5.6 billion and it was now a top 10 holding in the portfolio. This was a cause for concern because it came after Microsoft's announcement.
It also meant Buffett was buying Activision Blizzard stock as an arbitrage play on the acquisition, a decidedly short-term bet that went hard against his expressed belief in owning stocks for the long haul because doing so makes you a part owner of the business.
Going against the grain
Yet Buffett's move might not be as inconsistent as it appears. First, Buffett was already an owner of the stock. While the Justice Department is investigating allegations of insider trading on the deal, specifically options purchased by Barry Diller, David Geffen, and Alexander von Furstenberg that occurred just prior to the deal's announcement, Buffett maintains he knew nothing about Microsoft's interest when he first bought Activision stock.
In a letter released in February, he insisted Berkshire received "no bonanza" for that first tranche as shares were acquired at around $77 per share, with about 85% of the 14.7 million shares bought last October and the rest acquired in November.
NASDAQ: ATVI
Key Data Points
Microsoft's offer for Activision values the video game stock at $95 a share, but after getting as high as almost $87 a share, the stock has slowly declined in value and goes for around $74 a share as of this writing. That means you could buy Activision stock at an even better price than what Warren Buffett got.
The reason there is such a big arbitrage play is that some on Wall Street don't think the deal will go through. Buffett believes the opposite, and with the market providing such a big discount it's reasonable that he would buy more. That would be in keeping with his philosophy of buying "a wonderful company at a fair price [rather] than a fair company at a wonderful price."
Risky business
There is potential the deal falls apart. The U.K.'s antitrust regulator, for example, said earlier this month Microsoft buying Activision could undermine competition in gaming consoles, subscription services, and cloud gaming. It called for the deal to be looked at closely. That might result in the deal not happening at all, or it being significantly changed to win approval. It could also delay the closing of the transaction well beyond the second quarter of 2023, which was the originally suggested timeline.
So it seems Buffett (or rather one of his investment advisors who actually made the trade) really liked Activision Blizzard, and then, when an opportunity arose to buy more shares at a discount to the purchase price, he jumped at it.
Activision Blizzard remains the premiere video game company with some of the biggest properties in the industry. World of Warcraft, for example, is still the biggest massively multiplayer online (MMO) game with almost 121 million total players compared to nearly 40 million for runner up Final Fantasy XIV Online. Call of Duty also continues to be a top game franchise and is getting a reboot with the launch of Modern Warfare II next month.
Yet despite this Microsoft's seeming commitment to the deal, this might not be a time to copy the Buffett's investment strategy. Video game spending is slowing, falling 13% in the second quarter to $12.4 billion, and Sony recently reported a 26% decline in game sales for the period. Meanwhile, Microsoft's Xbox sales were down 11%. In an economy that appears to be deteriorating this could be on of the Oracle's rare bad bets.
