Saturday, November 22, 2008

Leveraging Buffett

I am sure most of you would agree that the stock market behaviour has been anything but rational during recent times. We have witnessed market values for out of favour companies erode with seemingly vicious speed. Many people may be feeling helpless with the declining values that the markets have imparted on their investments. What can we do?

In my last post, I referred to an article which Buffett wrote where he stated that he is putting his money where his mouth is and is investing his personal cash into primarily U.S. equities. He feels the time is right to start investing. One question you may be asking is how can we make Buffett-like investments? I believe one of the best solutions to that question is to consider investing in the Berkshire Hathaway class A shares or the more affordable class B shares. There are several reasons why you may want to invest in Berkshire Hathaway shares at this time.

The first reason is that Buffett is a very disciplined and patient investor who knows how to invest wisely in fearful markets. He has a long-term investment performance track record that is widely recognized as the being the best ever. Who would be a better choice to invest your money in these markets?

Second, Buffett can get access to deals that the average investor cannot participate in. In the Warren Buffett way, we have written about special convertible preferred shares that Warren has been able to invest in over the years, primarily because of his reputation as a wise and patient investor with deep pockets. In these markets, there are many companies that desperately require patient capital, and we have already observed special Berkshire-only deals made with General Electric and Goldman Sachs.

Third, by buying shares in Berkshire Hathaway, you get to own interests in some of the finest, cash-generating companies on the planet. Buffett, together with Munger, have purchased incredibly profitable companies over the years that have met their strict standards for quality. In fact, many of these companies are now owned outright by Berkshire Hathaway. So when you buy Berkshire Hathaway today, your investment is comprised of the same diversified companies that Berkshire owns.

My last point is that Berkshire Hathaway may be currently trading at a good price for investors. First, the share price of Berkshire Hathaway class B shares, has fallen from a 52-week high of $5,059/sh to a current price of $2,914/sh. Also the fact that Buffett is now bullish on buying equities is a strong endorsement that share prices in general have fallen below what he considers to be rational. Also, Barron's published an interesting article here, which supports the notion that Berkshire Hathaway may be available at historically cheap prices in today's market.

Disclosure: The Author is a shareholder of Berkshire Hathaway

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