What Buffett's Probably Buying Right Now

Includes: BAC, BRK.A, BRK.B
by: Rougemont
With the markets in turmoil and investors seeing the Dow plunge 513 points in a single day after already many losing days, it is probably a good time to check in with some of the most successful long term investors, and the top of the list for many people is Warren Buffett.
Back in 2008, Mr. Buffett wrote:

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."

..."In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price. Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

You can read his entire op-ed here.
One of the most important reminders for investors during times of market turmoil is what Mr. Buffett states here:

"You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy. Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. "

Based on this, what do you think Warren Buffett was doing this weekend? I doubt he was buying canned goods and looking at double short ETFs this weekend. Most likely he making a shopping list of stocks to buy on Monday. The economy is not great and will probably remain lousy for some time, but that doesn't mean money can't be made in stocks. It also doesn't mean this will last forever, and if you want to buy when stocks are cheap you have to buy them at times like this. If the economy was in a boom and headlines were rosy, do you think you would be able to buy Bank of America (NYSE:BAC) stock for $8.50? Fast forward a few years, and consider that there are some stocks that will be trading at multiples of their current price.
Warren Buffett recently stated that he believes the S&P downgrade was a mistake and that the U.S. is not likely to see another recession. Furthermore, Mr. Buffett is shopping for companies and Berkshire Hathaway, Inc. (NYSE:BRK.A) just announced a $3.25 billion buyout deal for Transatlantic Holdings.
Warren Buffett is a big believer in fundamental analysis of stocks, but there are also other indicators that the market is too cheap and that negativity is too pervasive. There are many signs that stocks are oversold and due for a sharp rally. On August 5, 2011, Tom McClellan, editor of The McClellan Market Report wrote:

"There are ordinary, garden-variety corrections that occur from time to time. And then there are the sort of amazing washouts like we saw the first week of August 2011 that are in a different class. This week's chart shows the extreme nature of the washout of selling pressure which occurred. Ordinarily, it is considered a bearish event for an individual stock to break below its lower Donchian Channel line. But when we see large numbers of stocks all doing that at the exact same time, then the meaning changes. Readings above 60 tend to mark important short term price bottoms. So getting this indicator all the way up to 96 shows that a concerted and exhaustive selling wave has taken place."

This is potentially very bullish for stocks and you can read more on this analysis here.
I recently wrote that the S&P downgrade could already be mostly or totally priced into the market, and that I believed Wall Street insiders were tipped off on the exact timing of the S&P downgrade. This would explain the "coincidence" of a 513 point plunge in the Dow just the day before the downgrade was "released". It appears that many placed large short bets on the markets a day before the downgrade, and if Europe stabilizes those shorts could be forced to cover soon. This big short bet on Thursday could be another indicator that most or all of the downgrade "news" is priced in. Continued policy mistakes from the U.S. and European governments are the greatest risk to the markets, not a downgrade from a discredited ratings agency. If the ECB buys Italian bonds and even cuts rates, the market is poised for a sharp rebound. There is a lot of money to be made in this market turmoil, and I think investors should be looking for those opportunities now.
The data is sourced from Yahoo Finance and Insidercow.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes only.

Disclosure: I am long BAC.