Be Like Buffett: Get Off the Roller Coaster

Watching the stock market these days is like being on a roller coaster - but it does not have to be. An investor would do well to think about the stock market as a person who is sometimes rational, yet sometimes irrational, always emotional, and subject to manic fits. Do not let Mr. Market guide you, but rather take advantage of his fearful moments to buy great businesses with good long-term economics, when these companies are selling at reasonable/advantageous prices.

Another way to look at it is to see the market as an auction, where people bid every day on all public companies. You can either buy or not. When the people at the auction are depressed and bidding really low for excellent companies, you would want to put in a bid and buy. If you knew of a local aptartment building or farm and you knew it was great and had a wonderful history and future, but everyone in town showed up to the auction depressed for a variety of factors, and was bidding low incorrectly, then you should bid and buy this wonderful building or farm at this low price.

Warren Buffett's best purchases were made in recessionary-depressed markets.

Charles Munger, his partner, has said that they accomplished the results they did by avoiding mistakes and taking advantage of inanities - and thereby buying excellent businesses when somebody was foolishly throwing them away based on emotion.

Often people do not throw away a great business. But often you can buy a great business at a fair-reasonable price. There are many like that now.

I would say this basket of companies should be bought when opportunistic pricing is presented by a foolish market: Berkshire Hathaway (BRK.A), Kraft Foods (KFT), Procter & Gamble (PG), General Electric (GE), Diageo (DEO).

Another good strategy is to consistently buy shares of a great fund like Gabelli Equity Trust (GAB) . Just owning some of Berkshire and Gabelli is wonderful because you get to see what Warren Buffett and Mario Gabelli are buying.

If one has cash and is diversified in good businesses that pay dividends, one can stay the course.

The next months may be very tough. But Warren Buffett has said good businesses will be worth more in five or ten years.

One thing I would add is that it's not a good idea to buy companies with average to bad economics just because they are cheap. These businesses can get cheaper. Stick to buying clear winners - companies that are inevitably going to do well like Coke (KO), PG, Wells Fargo (WFC) and such; you do yourself a huge favor by just not making mistakes. That's how they won at Berkshire. Stick to the obvious, and don't try to jump seven foot hurdles - go for the one-foot easy hurdles.

Buffett uses the example of Ted Williams, a baseball player with a great batting average. He used to only swing at fat pitches and that's what you want to do. Wait for an obvious fat pitch (like Coke, if it gets cheap). This is a great company and one can buy shares when they are reasonably priced and do well over time.

Disclosure: The author is long BRK.B, KFT, PG, GE, DEO, GAB.

Comments

[No Moss:]

I would generally agree. Diageo has been down ever since I bought it last year (at $87), but I have hopes it will rise at some point. Like GE, from $37 to the low twenties. I think these are both solid buying opportunities. GE in particular will come roaring back when it gets over the credit crisis.

2008 Oct 02 12:22 PM

[User 265729:]

I don't know... I don't see a lot of these name brand things moving at all. Once consumers realize that the cheese, mouthwash, toothpaste, etc. is sufficient, it will be hard to pull them back at higher prices. I think you would need to see a big lift in area of consumer's discretionary spending. Long term for sure...

2008 Oct 02 04:54 PM

[kurt walter:]

My hope is Saint Warren loses his butt on the Goldman investment.

2008 Oct 02 08:08 PM

[ozcutty2:]

i've been tempted by GE, but I don't understand how a company thats made so much cash over the years is now short enough to have to give such good terms. Giving a discount and a 10% yeild is fire sale stuff, doesn't make sense to me. If I was a share holder, i'd be pissed

2008 Oct 02 08:45 PM

[No Moss:]

Curbs-In and I disagree on the idea of brands. Brands like Gillette or Johnny Walker are virtually impossible to replace or displace. In the case of Gillette, they have virtually no competition and are able to charge premium prices for their top-end products. Getting and keeping shelf space is easy to do for a proven seller, and difficult to do for a beginning product.

GE's main problem, to nobody's surprise, is that it's vulnerable to the credit crisis and to the real estate market. Secondarily, it's vulnerable to a worldwide slowdown. I wish I hadn't bought it, but at $22 and change it's on sale. AAA rating, solid businesses, and sufficient income to at least maintain the dividend and work through the crisis. I don't see what's not to like with GE at this price.

2008 Oct 02 11:18 PM

[jse17:]

Before us is what I assume to be a serious article. Mario Gabelli mentioned in the same breath as Warren Buffett creates amusement if not incredulity!

As to GE, think of the firm as a mini index 500 vehicle. If GE fails, so does the country, an arguably unlikely event! With this said, close your eyes, hold your nose, and buy GE serially to its ultimate low!

2008 Oct 03 08:59 AM

[tipalia:]

you want to own all these companies buy BRK.B . You want to own GE and get a 10% yield don t buy the stock buy BRK.B. Are you looking really hard to buy something for 10 cents or less on the dollar? let Warren do the homework for you. Would I buy BRK.B now? No ,too much press right now but if we see a 15% pull back I ll probably buy some. If you can t beat them,stop being jealous and wishing the worst, instead join them. It may look expensive now but wait 5 years and you ll kick yourself so hard you won t feel your behind for another five years after that. BRK.B is a no brainer in times like these when you have a lot of cash and they come knocking at your door begging you to grab a part of their company at huge discounts accompanied by a huge yield that you and I can t get.

2008 Oct 03 09:04 AM

[bigtime99:]

Brk may look good now, but from mid-1998 until mid-2006 the shares moved from 76000 to 86000. That's negligible for 8 years of waiting.
His fund has relatively quick upswings followed by long, flat periods. Buffet himself has warned that future returns are going to be less than past. How do you know we aren't starting another decade long flat stretch?

2008 Oct 03 10:05 PM

[Hedged In:]

If you buy GE or GS you're on the other side of Buffett's trades -- you're paying him 10% a year, which drains your cash flow, and giving him warrants, which reduces your upside.

2008 Oct 04 04:12 PM

[keithpiccir...:]

Y.I. - looks right to me. GE has more downside until they can clean up their financial house. They do have some wonderful divisions.
As far as the Ted Williams analogy goes, a good pitcher will only give you one good pitch to hit in each at bat, and it will in all likelihood be on a corner or in a zone. You don't get a "fat pitch so your average will go down.
That's what bear markets, and this frenetic current state are doing to all who play.

2008 Oct 04 09:49 PM

[curious cat:]

just bought a g.e. washer and dryer. they will be delivered monday. i paid with a credit card, so you can count on credit flowing again, g.e. going up in value and me, in clean clothes, looking fresh and snappy.

the bill is passed. the fed is active. interest rates will come down or stay the same. that means the dollar will get weaker and more plentiful, again. it is time to inflate the last bubble, my friends. people will rush to gold, if business picks up, and to gold, if business slows down. for safety, for value, for the last bubble, gold.

2008 Oct 04 11:42 PM

[No Free Cake:]

GAB? Seriously? On what track record?

2008 Oct 05 12:04 AM

[No Free Cake:]

Sorry - my bad on GAB. Rushed to judgement just looking at price charts rather than the total return.

2008 Oct 05 12:20 AM