When in doubt — and there’s been a lot of that lately — what do you do? One option is to follow those who know what they’re doing, those who have a reputation for making the best of a bad situation.
So, how about Warren Buffett?
Sure, The Oracle of Omaha took some heat for being “behind the times” and staying away from stocks in 1999, but he was revered during the subsequent bust. Lesson learned, the public continued to worship him, especially as he warned of the excesses of debt and leverage.
What is Mr. Buffett saying and doing now? It’s a valid question, because while there’s been some bad news — his Berkshire Hathaway portfolio has dropped 26 percent from about $70 billion to $52 billion and the stock price (NYSE:BRKA) is hovering near a six-year low at about $75,000 a share — he’s still exceeded the market. If he had performed with the market, his portfolio would have been trimmed to about $35 billion… so he must be doing something right.
So what did he do? If you check out the most recent filing with the SEC, you’ll find Berkshire ’s biggest moves during the tumultuous fourth quarter of 2008:
- Sold 33 million shares, 54 percent of his holding in Johnson & Johnson (NYSE:JNJ)
- Sold 9.5 million (9 percent) of Procter & Gamble (NYSE:PG)
- Sold 5.4 million (7 percent) of U.S. Bancorp (NYSE:USB)
- Sold 4 million (5 percent) of Conoco-Phillips (NYSE:COP).
- Bought 14 million shares of Constellation Energy (NYSE:CEG)
- Bought 8.7 million of Nalco (NYSE:NLC)
- Added 6.3 million (10 percent) to his holding of Burlington Northern Santa Fe (NYSE:BNI)
- Added 2.9 million (10 percent) to his holding of Eaton Corp
- Added 2.1 million (38 percent) to his holding of Ingersoll-Rand
From these moves, it appears Buffett sold large positions in two companies (JNJ, PG) that weren’t performing poorly but might have allowed him to raise cash to make preferred stock investments in the financial industry that’s paying 10 percent. He may also have been nervous about the prospects of US Bancorp (financial sector) and Conoco-Phillips (declining energy prices).
On the buy side, he appears to like the steady cash flows of utilities and may be loading up on infrastructure plays (water-treatment company Nalco, and industrial suppliers Eaton and Ingersoll Rand).
So with all of this in mind, here are the lessons you can learn from his actions:
- Take some off the table if you can: If you still own stocks that have been relatively unscathed (like JNJ), you might cash out some of your holdings to pursue better opportunities.
- Avoid risky business: We can’t expect to get Warren’s 10 percent bank deals, but there may be other opportunities to trade off a modest potential price gain for a steady return in, say, in a municipal bond or bond fund.
- Read the signs: It doesn’t take a PhD from Wharton to know that infrastructure is clearly going to be big in the future.
- Don’t jump at bargains: Temptation is everywhere, but this downturn is more complex and widespread than almost any other. So be careful about “better opportunities.” Do your due diligence, and if something looks attractive, take a small stake and add to it later. That’s the Buffett approach, and it’s worked well.
One way to do your due diligence is a site like WeSeed, where you can “play the market” for free, with no risk. If you do well there, well, maybe you should consider moving up to the big leagues.
After all, there’s nothing wrong with playing follow the leader — when you trust the leader.
Jennifer Openshaw, author of The Millionaire Zone, is co-founder and president of WeSeed, whose mission is to enable people to discover the stock market in their everyday lives through their passions, their fashion, their careers, their kids, and the brands they know and love. Her empowering advice, which helps everyday Americans do more with what they have, has been seen on Oprah, Dr. Phil, The Today Show, CNN, CNBC, and Nightline. You can reach her at jopenshaw@weseed.com.
