What you can learn from Buffett

What you can learn from buffett
Have cash ready and look for great companies with great price tags
TODAY Weekend • October 11, 2008
Richard Hartung

BESET by falling share prices and surrounded by ailing companies, many investors are looking for guidance as they scramble to figure out what to do with their money. With his company Berkshire Hathaway making massive share purchases last week, investment guru Warren Buffett seemed to offer leadership and a ray of hope amidst the gloom.

After he put US$5 billion ($7.4 billion) into Goldman Sachs and US$3 billion into GE, some investors saw it as a signal to buy. Mr Buffett’s move also gave stock markets at least a temporary shot of confidence, given his strong track record of investing. Some media are even likening Mr Buffett to Mr J Pierpont Morgan, who in 1907 organised a rescue of failing financial markets in the United States and put his own money behind the plan.

Mr Buffett hasn’t said that his move was intended to bolster markets or send a signal, even if it seemed to do both. In an interview with award-winning American television journalist Charlie Rose last week, for example, he said he bought into GE because “it was an attractive investment”.

What smaller investors may be wondering, then, is whether to follow Mr Buffett in buying shares or whether the moves just represent bids to strengthen markets and deals only Mr Buffett could achieve. It’s clear Mr Buffett is no ordinary investor. Having billions to invest gives him distinct advantages. Berkshire Hathaway negotiated very favourable terms with Goldman Sachs, receiving a 10-per-cent dividend on its preferred shares and warrants to buy US$5 billion worth of common shares at US$115 per share anytime during the next 5 years. Mr Buffett got a similar deal for GE, including an option to buy common shares at US$22.25 apiece during the next five years. Most investors won’t get such good deals.

Still, the purchases show thatMr Buffett believes there are good investments available. As the chairman of a publicly listed company he has a fiduciary responsibility to invest to make money for Berkshire Hathaway’s shareholders. He may want to bolster confidence in the financial system, and buying shares of Goldman Sachs and GE did encourage the markets. He can do interviews or make statements to reassure investors too. Whereas Mr Morgan used his own money to make investments in 1907, however, Mr Buffett used company money and could get into real trouble purchasing shares to help the overall economy at the expense of shareholders. Investing to benefit his company then had to be his key priority.

It’s also important to realise thatMr Buffett is a very long-term investor. His ownership of about 9 per cent of Wells Fargo caught the attention this week as Wells battled with Citigroup to take over Wachovia. However, Mr Buffett actually started purchasing shares in Wells Fargo in the early ’90s. He bought more shares over time, with the average cost rising from US$3.41 in 1990 to an average of US$22 by the end of 2007. Mr Buffett has had a wild ride this year, with shares rising to US$44 and falling to $20 before closing at US$27.25 on Thursday. Whether it’s Wells or Goldman or GE, he’s obviously in it for the longer term. Few other investors hold on for nearly two decades.

In contrast to last week too, Mr Buffett didn’t look quite as prescient this week after Goldman Sachs shares closed at US$101.35 on Thursday and GE closed at US$19.01. Investors who followed his lead last week could well have lost money.

Even if Mr Buffett is different from most investors, though, there are valuable lessons that smaller investors without billions of dollars and a decades-long investing time horizon can learn from him. Even with much of its nearly US$300 billion in assets tied up in illiquid companies, Berkshire Hathaway still had over US$40 billion in cash before investing in Goldman Sachs and GE. Patiently keeping cash at the ready enabledMr Buffett to act fast when he saw a good deal. Similarly, small investors can keep cash standing ready until they too find the right deal.

His moves also highlighted that some great companies are selling at bargain-basement prices. Mr Buffett said GE has “strong global brands and businesses”. There are other excellent companies in the US, Singapore and other markets too that trade at low prices. For investors willing to put money directly into strong companies with good long-term prospects, there are attractive opportunities.Mr Buffett’s picks like Goldman Sachs and GE or even Berkshire Hathaway itself, as well as strong local companies like Singtel, have been battered down to low levels. For investors concerned about selecting the right companies themselves, dollar cost averaging investments over the next 6 to 12 months into unit trusts that purchase shares in strong companies could be a good alternative. Even if share prices fall in the short term like Goldman Sachs and GE did, investors with a longer time horizon still have good potential to make money on their investments. Small investors won’t usually get as good a deal as Berkshire Hathaway. Still, one could do worse than to follow Mr Buffett’s sage advice to Mr Rose and make some bold moves amidst current concerns. “You want to be greedy when others are fearful. You want to be fearful when others are greedy.It’s that simple.”

The writer is a consultant who has lived in Singapore since 1992.