Every time an iconic company experiences a crisis of confidence and the stock swoons, Warren Buffett seems to swoop in and seize an opportunity. In September of 2008, in the midst of the financial crisis, Buffett swooped in and invested $5 Billion into Goldman Sachs (GS). Two years later, with Bank of America (BAC) under fire regarding its capitalization and its stock trading down 54% on the year, Buffett again swooped in and invested a cool $5 Billion. Now, we need to keep in mind that Mr. Buffett did not make these purchases on the open market but instead negotiated preferential terms unavailable to us mere mortals. In both cases he received dividend paying preferred shares plus significant warrants. Why were these firms willing to cut Buffett such a sweet deal? In addition to receiving much needed capital, these firms benefited from the vote of confidence Buffett’s strong brand conveyed. Mr. Buffett made sure he was handsomely compensated for lending his good name to these firms in their time of need.
While we may not be able to get paid for our good name, we can follow in Buffett’s footsteps and opportunistically invest when fear ravages the market. But we have to be prepared. One key element to Buffett’s investments that often goes overlooked is the fact that he had $5 Billion dollars standing by ready to invest. This was no accident. Buffett has coined two famous rules of investing. Rule Number 1: Never lose money. Rule Number 2: Don’t forget rule number 1. While Buffett is typically a long term investor, he believes in protecting one's capital and is not against sidestepping periods of increased risk. If we examine Buffett’s history with Bank of America for example, we can see that he took a position in Bank of America prior to his recent $5 billion dollar infusion. Back in 2007, at the height of the subprime crisis, he bought 9.1 million shares of BAC. But he subsequently became uncomfortable with the bank’s management and implied risk. By the end of 2010, he had sold off all his remaining shares. This move to sell shares and protect capital is what put him in a position to be an opportunistic buyer in September of 2011 after the stock had lost 54% of its value over the previous 8 months.
The lesson here is, if you want to be an opportunistic buyer, you have to be an opportunistic seller and a protector of capital. Maintaining stop loss orders or setting alerts that trigger a review of the position should it fall to a specified price target are good strategies for protecting capital and positioning yourself to be an opportunistic investor.
The three equities below all triggered their SmartStops risk alerts earlier this year placing them in their current “Above Normal” risk state. The first two equities are ones we have already discussed, the recent Buffet picks of Goldman Sachs and Bank of America. The third is a classic value play as well as a play on an economic recovery, the Mexican cement giant Cemex (CX). All three have been severely impacted by the financial crisis and economic slowdown and have pulled back significantly since triggering their risk alerts. Assuming protective action was taken, could now be a good time to pull a Buffet and get back in?
By the numbers, all three equities appear to be classic Buffett value plays. Should you decide to take the plunge, remember Buffett’s golden rule of investing and protect your capital by placing stop loss orders or by setting risk alerts.