Thesis:
A smart value investor was an aggressive buyer of undervalued stocks in 2008 and 2009. Since Mr. Buffett was not aggressively buying stocks during the financial crisis, he laid the foundation for his subsequent mediocre investment returns.
His insistence of holding Billions of dollars of cash while the market was down substantially was a perplexing mistake for a seasoned value investor. His inability to seize values resulted in a lost decade for shareholders. The BNSF acquisition is examined and it’s costly dilution to shareholders.
“Cash combined with courage in a time of crisis is priceless.” -Â Warren Buffett
Patience, Discipline and Panic:
The hard part of being a value investor is avoiding overpriced stocks when everyone else is buying. It requires discipline. The huge reward for the patient investor is when prices are attractive, or in this case, extremely attractive, you have cash to take advantage of incredible opportunities.
Unfortunately, Mr. Buffett did not really take advantage of these incredible opportunities. In fact, the Burlington Northern purchase required selling other investments as well as diluting shares near decade low valuations. Not using cash on hand to purchase stocks or buyback Berkshire stock was a missed opportunity for shareholders.
Be greedy when others are fearful and fearful when others are greedy. Warren Buffett
Berkshire a net seller of stocks in 2009:
We made some sales early in 2009 to raise cash for our Dow and Swiss Re purchases and late in the year made other sales in anticipation of our BNSF purchase – Warren Buffett Berkshire Annual Letter
I can’t explain why Mr. Buffett wasn’t greedy for the great opportunities in the stock market during this period. Perhaps he felt that BNSF, Goldman, Sachs and General Electric would perform better over time. I believe it was a huge mistake, especially for an investor whose businesses generate Billions of dollars that need to be invested.
SPY 10 Year Price Returns (Daily) data by YCharts
The benefit of being a value investor is that you can profit handsomely from other investors who purchased overpriced shares at the top and then are panicking at the bottom.
“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”
Jim Cramer, CNBC October 8, 2008
SPY data by YCharts
Today’s market:
Berkshire Hathaway: So Much Cash, Such An Expensive Market (BRK-A)
Over the last decade, Mr. Buffett has complained that he has had trouble putting cash to work and cited high valuations as the problem. As we see, valuations are much more expensive. It is a legitimate question as to why he wasn’t able to purchase more when prices were lower and more attractive.
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“Wait for a fat pitch and then swing for the fences.” -Warren Buffett
Value:
In 2009, Berkshire threw off $8-$10B in cash and even more in the years to come.
