Invest With the Masters

Scraping together enough coin to win the annual luncheon auction with Warren Buffett is probably beyond most investors' means. With the proceeds going to charity, this year's winning bidder forked over $2.63 million for the privilege.

Feast or famine
While we likely can't afford to break bread with the greats, we can peek at their stock ideas through their Securities and Exchange Commission filings. Here, we'll pore over some of the top investors' reports to see which stocks they've chosen as their best investments. We'll then check in with Motley Fool CAPS members to learn whether they agree.

First, a few caveats ...

• There's a delay between when the stocks were bought and when these investors filed their paperwork, so they might have sold them since.
• These legends may be hot investors now, but that can change in an instant. Bill Miller was a wunderkind after beating the market 15 years in a row. Then he went cold for three. He came back in 2009, but we don't know what 2010 will bring.

Contrary to popular opinion
Fools should definitely do their own further research here. But in the meantime, let's take a look once again at hedge fund manager Daniel Loeb, founder of Third Point, perhaps as well-known for his acerbic wit as his investing prowess. Over the past decade, Loeb has realized a 244% cumulative return compared with an 8% loss for the S&P 500. When last we looked at his investments, we noted Loeb was still heavily invested in financials despite having sold out his position in Citigroup. So let's take a look at where he is today.

Fund: Third Point
No. of Stocks Owned: 26
Top 5 Holdings: TransDigm, Alcon, CIT Group, PHH, Health Net
Top Sectors: Health care, industrials, financials, consumer services, technology

Despite having a fairly concentrated portfolio of just 26 stocks, we find that Loeb had a lot of turnover. For example, he completely sold out of his holdings in auto industry names like parts suppliers Lear (NYSE: LEA) and Dana Holding (NYSE: DAN), while also selling off carmaker Toyota (NYSE: TM). He added only three new stocks.

In his most recent shareholder letter, Loeb says that paying attention to how the government flexes its regulatory muscle remains an important component of his investment strategy. As a result, his strategy of shorting for-profit education players received a big boost, though in general he tries to completely avoid sectors where the government might step in in a big way.

Price is what you pay
The backlash against the Obama administration's Gulf of Mexico drilling moratorium and the harsh new regulations that might be imposed continues to burn companies plying the waters there. Yesterday, we noted how Halliburton (NYSE: HAL) said the ban hit third-quarter earnings and will affect fourth-quarter results, too, even though the moratorium has been lifted. That's because, as Swift Energy (NYSE: SFY) officials noted, the proposed regulations are simply a "de facto moratorium."

Plains Exploration & Production made plans to leave the Gulf in August and expand its onshore operations as a result of the regulations, and it's likely it's not going to be the last one pulling out. But in doing so, it needs to be careful that it doesn't compound the problem by overpaying for the new expansion. The Fool's Toby Shute suggests it may have done just that with its $578 million purchase in South Texas oil country.

CAPS All-Star TSIF says it would be distressing if Plains Exploration & Production paid too much, but at current valuations, it still remains an attractive oil play.

Whether oil will stay at a price point where Plains Explorations buy in to Ford Shale will be lucrative or not is clearly a risk. Speculation that Plains Exploration may be a takeover target is also only vapor at this point, and serious investors shouldn't jump out after such long shot prospects. At a 1.20 Book and 13% profit margins, however, Plains Exploration looks like it should hold up. Debt is high, as expected, but income has been rock solid the last four quarters.

The pot calling out the kettle
Xerium Technologies, which makes industrial clothing products and roll covers, is the sort of post-bankruptcy reorganization play that Loeb believes will ultimately outperform, despite the poor results the segment showed in its latest quarter. As the market sells off, these distressed securities typically underperform, which is why Loeb prefers conservatively capitalized reorganizations. (They tend to do better.)

CAPS member nprfreak agrees, believing Xerium will outperform and put the reorganization behind it.

Top notch management team and limited aftermarket product set for tight focus. No. 1 or No. 2 in most of their markets from both products and a well established support network. The industry they support (papermaking) might be perceived as a disadvantage but also presents an opportunity to gain market share from [original equipment manufacturers] and competing aftermarket suppliers.

Value is what you get
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