Much ado has been made recently about Buffett’s buying. A little over two years ago (as of Dec 31, 2006), Berkshire Hathaway held over 43 billion in cash and equivalents. Just in the last year, Berkshire has played banker to the tune of $21 billion. I say banker because this $21 billion went solely to the purchase of fixed income instruments and preferred stock–$400 million for Vulcan, $300 million for Harley Davidson, $150 million to Sealed Air, $5 billion to Goldman Sachs, $3 billion to General Electric, $6.5 billion to Wrigley, $3 billion to Dow Chemical, $2.6 billion to Swiss Re, and now, $250 million to Tiffany’s.
So, it’s clear, Buffett’s been buying. And we know that he is even buying American equities in his personal portfolio, for the first time in many years.
But where has he done most of his buying? Until we see the latest 13F, we can’t say for sure. But right now, it looks like most of his purchases have not been in common stocks, but in bonds, convertible bonds, and preferred stock. Of course, for many of these stock deals, Buffett also negotiated conversion rights or warrants for the purchase of common stock. However, it is very intriguing to me that Buffett has not purchased more equities outright.
Seeing this, I am of two minds. I have seen the values of common stocks plummet to lows not seen in my lifetime, and I feel compelled to take advantage. I also see the world’s most successful investor demanding more security for his investment dollars than merely a low-priced common stock. Perhaps my perceived advantage is not as great as I surmise.
Most simply, we can interpret Buffett’s purchases in one of two ways. On the one hand, perhaps Buffett doesn’t see common equities as cheap enough at these levels (i.e., they cost more than their intrinsic value). Or, on the other hand, Buffett is merely being opportunistic–asking for the extra margin of safety merely because he can get it in this environment. On this view, the common stocks of Harley Davidson and Tiffany’s may be cheap enough for an adequate margin of safety, but the savvy investor capitalizes on the opportunity by demanding an even greater one.
All told, stocks look cheap, and many value investors are seemingly buying with abandon. Yet, Mr. Buffett’s actions give me pause. Are stocks really cheap enough? If not, then I may need to raise my standards.