Putting Buffett to Work for You

03/26/2004 12:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

"Warren Buffett’s annual letter shareholders is full of talk about investing, and it’s that willingness to walk the talk that makes Buffett’s letter worthwhile reading for investors," says Jim Jubak. "So how do you put Buffet’s observations to work in your own investing life?"

  • Get your house in order. Take a hint from Buffet’s decision to take his lumps in the General Re derivatives portfolio. Make sure that if the financial markets do tumble, creating a buying opportunity of the kind that Buffett waits for, that you won’t be too busy shoring up your personal balance sheet to take advantage of it.

  • Make sure you’re being adequately paid for risk. For example, junk bonds don’t look attractive now not because they’ve become so much more risky over the last 12 months. Rather, yields have fallen so far that investors, in my opinion and Buffett’s, aren’t getting paid enough to take on the credit risk.

  • Don’t do something stupid with your cash. Sure, a 1% return on cash is depressingly low, but it still beats a 10% loss from an ill-considered purchase in the stock or bond markets.

  • Consider plays on a weakening dollar. If the trend is strong enough to get $12 billion of Buffett’s attention, it deserves a glance from you, too. For equity investors that can mean buying commodity stocks, big US-based multinationals that do a major portion of sales in foreign currencies and foreign companies. These companies are using strong local currencies to buy control of key markets, often from US companies.

  • Remember that the long-term is more than just a month or the next quarter. Hugely profitable buying (and selling) opportunities occur regularly but not frequently. To profit from them you need to be ready for them when they appearand to do nothing too stupid while you wait. The last point seems a particularly important lesson now as we wait to see if the current weakness will turn into a major retreat that will take some of the froth out of stocks. Keep some powder dry.

"Meanwhile, Berkshire Hathaway (BRK.B NYSE) reported that book value, Buffett’s preferred performance measure, climbed 21% in 2003, the company’s best performance in five years. Float from the insurance operationsthe money that Berkshire Hathaway collects in premiums and gets to invest while waiting to pay out claims climbed to $44.2 billion and the cost of that capital fell to a negative 4% for the year. In other words, Berkshire Hathaway got paid to take money and invest it. Two keys for Berkshire Hathaway going forward: 1) industrywide insurance prices look to remain strong for at least another six months, and 2) investment opportunities look likely to pick up in the next 12 months so that Berkshire Hathaway can invest some of its $31 billion in cash. I own shares of Berkshire class B, and I am increasing my June 2004 target price from its prior $3,020 to $3,350 a share."

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