By Jason Simpkins
In investing, it's a taboo practice to follow the leader.
Unless that leader is Warren Buffett.
An old investing adage holds that following the masses is a formula for generating stock-market losses. Independent thinking is the key to superior returns.
The exception is Buffett, the so-called "Oracle of Omaha," the guru whose investment moves are among the most-closely watched in the stock market.
According to a recent study, buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns. In fact, over the past three years, this strategy has delivered double the return of the Standard & Poor's 500 Index, according to research by professors at both American University and the University of Nevada at Las Vegas.
Even with that one-month lag, an investor who mimicked the moves of this market master would eclipse the S&P 500 returns by 14.26%, the study concluded.
Warren Rides the Rails Again
Last year, Buffett was keen on railroad stocks. Buffett's company, Berkshire Hathaway Inc. (BRK.A, BRK.B) made its first move on Burlington Northern Santa Fe Corp. (BNI) last April. In a series of highly publicized moves, Buffett & Co. acquired nearly 40 million shares – or close to 11% – of the railroad. Berkshire also snapped up 10.5 million shares of Union Pacific Corp. (UNP), and 6.4 million shares of Norfolk Southern Corp. (NSC).
Later in August, Berkshire went shopping again, loading on an additional 3.3 million shares at $80 a piece. And in September, Berkshire bought 6,000 more shares of Burlington Northern.
And Buffett still wasn't done. According to a filing with the U.S. Securities and Exchange Commission, Berkshire bought 10,300 shares over the two-week period ending Jan. 22. The price per share – $75.51 – was the lowest price that Berkshire has paid so far. Buffett & Co. now own 18.2% of the outstanding shares of the railroad, which specializes in freight.
Berkshire Moves On European Insurers
In addition to building his stake in Burlington Northern, Buffett has moved back into one of his favorite industries: The insurance business.
One of his best-known forays into this industry was the Government Employees Insurance Co., better-known as GEICO. Founded in Washington, D.C., in 1936, focused on selling auto insurance to government employees. Buffett first invested in 1951. In 1995, Berkshire made a bid for the shares of Geico it didn't already own. The next year, it became a wholly owned subsidiary of Berkshire.
Last week, Berkshire Hathaway acquired 3% of Swiss Reinsurance Co. (OTC: SWCEY), the world's biggest reinsurance firm. Swiss Re had lost more than a quarter of its value since taking a $900 million write-down in November.
In exchange for taking on one-fifth of the company's risk, Berkshire Hathaway will receive one-fifth of all premiums from Swiss Re's property and casualty insurance over the next five years.
That exchange will allow Swiss Re to reduce its reserves, freeing up an estimated $1.6 billion in additional capital to return to shareholders.
"The additional capital efficiency as well as the downside protection will permit Swiss Re to retain flexibility in a softening property and casualty market," said Jacques Aigrain, the company's chief executive officer. "Furthermore, it will advance our efforts to manage earnings volatility – a key strategic priority."
Berkshire has greatly increased its insurance-related holdings over the past month. The company recently received a license to start its own bond-insurance company in New York. It also agreed to pay $440 million to buy a reinsurance unit from ING Groep NV (ING), the biggest Dutch financial-services company.
Interestingly, bond insurers and reinsurance firms have been hit hard as part of the ongoing credit mess, leaving investors wary of the shares of companies in both subsets of the insurance sector.
Berkshire Cools on China, Keen on Korea
Back in late October, Buffett paid his first visit to South Korea, where the billionaire U.S. investor has invested in 20 companies, including a 4% stake in the country's Number One steelmaker, POSCO Ltd. (PKX), South Korea's Yonhap news agency said.
In an email interview with Seoul-based Maeil Business Newspaper, Buffettsaid South Korean stocks are still attractive, despite some analysts' concerns that they may be overvalued.
"The Korean stock market a few years ago was by far the most undervalued market in the world," Buffett told the newspaper. "Since then, there has been a huge advance in the Korean market and the [Korean] won has appreciated against the dollar. Nevertheless, many Korean stocks still sell at more attractive prices than stocks in other major countries."
During that same period, reports revealed that Buffett had pared his China investments, believing that market was overvalued.
Buffett is the world's second-richest man, with assets of $52 billion, according to Forbes magazine.
News and Related Story Links:
What Does Buffett See in Swiss Re?.
- Money Morning:
Buffett's Fourth Quarter Investment Blitz.
- CNBC: .
- Money Morning News:
Warren Buffett and Berkshire Hathaway Purchase Stakes in 20 South Korean Firms, Including POSCO.