Why Warren Buffett Is Buying – And You Should Be Too

Email

Legendary investor Warren Buffett recently made news with his purchase of International Business Machines Corp. (NYSE: IBM), though I can't say I'm surprised.

Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.

And guess what, it's exactly what I've been counseling investors to do since this crisis began – bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").

According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).

In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.

Buffett Pulls the Trigger

As a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.

Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.

There are technical similarities, too.

For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News and YahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.

Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.

Coke is up tenfold since then. Enough said.

Here's what I think Buffett sees:

  1. IBM has shed its personal computer businesses and returned to its roots as a century-old technology company. I believe Buffett sees this as an opportunity to capitalize on further budget cutting and the need to do more with less. So-called "right sizing," or making technology work harder, has long been a strength for IBM.
  2. Big cash flows. IBM has enjoyed 25 straight quarters of per share profit increases -thanks largely to former-CEO Sam Palmisano, who gutted the place and who rebuilt IBM's core computer services businesses. The company's first female CEO, Virginia "Ginni" Rometty took over last month and is expected to provide strong leadership, so I expect this trend to continue.
  3. Increased per-client revenues. In downturns, it's easier to do business with companies you already have on board than it is to acquire new customers. IBM has a long history and deep client relationships that can likely be "farmed" to be worth far more than the changes to new technology providers would cost.

Unfortunately, these three things also tell me that – despite his very public pronouncements that things are on the mend – Buffett is girding for more turmoil.

They also suggest to me that Buffett really doesn't care. He's making investments that are devoid of concerns for volatility and short-term market fluctuations because he knows that value never goes out of style.

Buffett also knows that by properly concentrating his wealth, he's better off playing defense in this environment. He noted as much in last year's annual Berkshire shareholder letter.

So if you think that timing the markets is a good idea, yet you aspire to the kinds of returns that have made Buffett one of the all-time investing greats, think again.

The ability to find and buy distressed investments is becoming more difficult by the minute in today's markets, so you have to concentrate on growth if you want to get ahead – even if the payoff is not immediate.

[Special Announcement: Money Morning Chief Investment Strategist Keith Fitz-Gerald is always chasing down leads on potential profit plays - and he just dug up a big one. So on Monday, Nov. 21 he's going to share it with any Money Morning subscriber who tunes in to his free video briefing. We don't usually do this, but Fitz-Gerald firmly believes he's locked on to a game changer. And all you have to do to get in on it is register by clicking here.]

News and Related Story Links:

Join the conversation. Click here to jump to comments…

About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

Read full bio

  1. John Ciulla | November 18, 2011

    Mr. Buffett's track record speaks for itself and his long term picks are all with purpose.
    Of course, many disagree with his position or lack thereof on gold and silver but if you were to compare their performance to his flagship Bershire Hathaway over the last 10 years, the later has sadly
    been outperformed.
    I expect that to continue, especially in these uncertain times burdened with debt and easy money printing policies.

    • Gaterial Messman | November 19, 2011

      I've always had great respect for Warren Buffett, took his advice about Silver & invested my saving of $15k through Ceres Trading Goup with the guarantee it would double. I did literally want the silver I had bought but was told Mr. Buffett had the silver & wouldn't give me that amt. that I had purchased. 3o years later and now a senior, I live in a Senior communiy here in Seattle & am all but destitute with help from local food bank for food. Had I had any inkling back when, I never would have invested in Silver recommended by Warren Buffett.

  2. johnny | November 19, 2011

    i think if i wasnt living in the upper lower class neighborhood i live in i wouldnt see the technology coming in and out as fast as they show the rich buying Iphones notepads on the local news some one is selling it in the hood 100 dollars cheaper us poor got to have what makes us look a little more lower middle class and if i had al little what Mr Buffet hhas in his wallet i would invest in what the poorest wish they had bellieve me from down here somebody is makeing a killing the hustler any given day has 2 lap tops 5 phones the latest i pod i pad for sale and go to fremont high school huntington park high school every student has a phone and enough pocket money just in case something new hits the teachers still carry banana phones invest in technology i would if i could get out of here blood in blood out

  3. lucien quintin | November 19, 2011

    let's wait and see how his investment in B of A pans out.

  4. jj | November 20, 2011

    I think Buffett isn't that much of a genius,but he does know that fiat currency is a guaranteed loser,so he puts his wealth elsewhere.That's about all anyone has to do.Just make sure where you put it is run by smart people.

  5. Cheryl | November 20, 2011

    I agree. Oil and gold are the ones to pick. Also getting sound advice and understanding why it is positioned helps. I think it is good to research suggestions your self before buying, to avoid being emotional. But understanding is key.

Leave a Reply

Your email address will not be published. Required fields are marked *


3 + = nine

Some HTML is OK

© 2014 Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201, Email: customerservice@MoneyMorning.com