3 Things to remember about Buffett's buying spree

About Latest Posts Motley Fool StaffThe articles listed on this page are compiled by our team of Foolish Writers and …

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In 2001, Warren Buffett told Fortune magazine that stocks would look attractive if the total market capitalisation of all U.S. equities dipped below 80% of gross national product.

In August, that's exactly what happened. Sure enough, Berkshire Hathaway (NYSE: BRK-B) spent more money buying stocks in the third quarter than it has in at least 15 years. Don't you love when people put their money where their mouth is?

Berkshire invested about $24 billion last quarter. Of that amount, $9 billion went toward the purchase of Lubrizol, and $5 billion went toward the preferred-stock investment in Bank of America (NYSE: BAC) . Roughly $7 billion was invested into an unknown medley of stocks in the "commercial, industrial and other" category.

What should you make of it? Here are three things to keep in mind.

1. Buffett doesn't call bottoms. Anything could happen from here.
One of the best stories about Buffett buying stocks is his experience with The Washington Post Co. (NYSE: WPO) . As Andy Kilpatrick explained in his book Of Permanent Value:

After Buffett's purchase, the stock fell for the next two years, and Buffett's investment sank from $10 million in 1973 to $8 million in 1974. Post Co. stock did not move solidly ahead of Buffett's purchase price until 1976. Now the stake is worth more than $1 billion.

That's incredible when you think about it. Washington Post stock fell 20% and sat there for years after Buffett bought it, and it ended up being one of the best investments Berkshire ever made.

Buffett isn't concerned about timing bottoms, and his latest buys are no different. I don't think it would bother him one bit if stocks fell considerably from his recent buy prices. The goal is to buy good companies at good prices and hold them for as long as possible. What happens in the short run is irrelevant — and for Buffett, the short run can be several years.

Too many forget that when analysing his moves. In October 2008, Buffett wrote an op-ed in The New York Times. "I've been buying American stocks," he wrote. "If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

Stocks fell another 33% after the article was published. Some poked fun. Bad timing, they said. "Warren Buffett loses his Midas touch as shares drop," read one headline in early 2009.

But was it a bad move? Three years later, the S&P 500 is up about 30% from the day his op-ed was published. Ten or 20 years from now, the buys are likely to look even more prescient. It all comes down to your time frame.

2. It may not have even been Buffett doing the buying.
Berkshire Vice Chairman Charlie Munger once noted that one of the keys to Berkshire's success is its "extreme centralization" of capital deployment. He and Buffett are the only ones pulling the trigger.

But that's changing. To prepare for succession, Buffett hired two money managers — Todd Combs and Ted Weschler — to manager a chunk of Berkshire's money, estimated at up to $3 billion each.

"I wonder if he turned Todd Combs loose," one investor told Bloomberg about Berkshire's recent buys. "I hope Buffett went to the movies one day and Combs got on the phone and went crazy with buy orders."

Until more details come out, there's no way of knowing how much of Berkshire's third-quarter purchases came from Combs and Weschler. It could have been none, or it could have been most. SEC filings due out in the next few weeks should provide some clue. In general, individual purchases of less than $1 billion likely came from Combs or Weschler. In previous quarters, Combs opened stakes in MasterCard (NYSE: MA) and Dollar General (NYSE:DG) . Stay tuned.

3. This is why Buffett is rich.
Think about how ugly things were during the quarter Berkshire went on a buying spree:

  • The U.S. came within hours of defaulting on its debt for the first time in history.
  • U.S. debt lost its AAA credit rating for the first time in history.
  • Europe marched toward a potentially devastating financial crisis.
  • Several reputable economic metrics began pointing to a looming recession.

And Buffett backed up the truck.

"The cheaper stocks get, the better I like to buy them," he said in September.

Ideally, most investors try to follow that philosophy. In reality, few do. That Buffett actually buys when there's blood in the streets — rather than saying it when times are good and then retreating into panic when things get ugly — goes a long way to explaining why he's rich.

"What is likely … is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," he wrote in his 2008 op-ed. "So if you wait for the robins, spring will be over."

Wise advice — that few will follow.

Are you looking for quality stock ideas? Then click here to request a new free report titled The Motley Fool's Top Stock For 2012.

Written by Morgan Housel and originally published here at fool.com. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

More on ⏸️ How to Invest

A group of young people lined up on a wall are happy looking at their laptops and devices as they invest in the latest trendy stock.

Building a share portfolio as a young investor? Here's where I'd start

I think investing in ASX shares is a great idea. But where to begin?

Read more »

nerdy looking guy with glasses peeking out from under bed sheets
⏸️ How to Invest

How to avoid this costly ASX investor trap – it's harder than you think

Emotional investing is one of the most common mistakes people make. Here's how to avoid it.

Read more »

Young female investor holding cash ASX retail capital return
⏸️ How to Invest

How to turn $20,000 into $300,000 in 10 years with ASX shares

$20,000 investments in Domino's Pizza Enterprises Ltd (ASX:DMP) and these ASX shares 10 years ago would have made you rich...

Read more »

AGL capital raise demerger asx growth shares represented by question mark made out of cash notes
⏸️ How to Invest

What is an ex-dividend date, and can you profit from it?

What exactly is the ex-dividend date of an ASX dividend share? Is it something you can profit from for a…

Read more »

Five stacked building blocks with green arrows, indicating rising inflation or share prices
⏸️ How to Invest

What is reflation, and why is everyone talking about it?

Investors are starting to talk about the dangers of 'reflation' for the ASX share market. Here's what that means for…

Read more »

asx share price on watch represented by investor looking through magnifying glass
⏸️ How to Invest

Here's why Warren Buffett prefers buybacks to dividends

Berkshire Hathaway Inc (NYSE:BRK.A)(NYSE:BRK.B) has been buying back its own shares. Why is that better than paying a dividend for…

Read more »

⏸️ How to Invest

Why I think Warren Buffett is right to think a market crash is always coming

Following Warren Buffett’s lead in planning for the next market crash could be a profitable long-term move, in my opinion.

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »