It’s a bit tougher to find deep values in the market these days, but the rest of Buffett’s strategy is still available to us mere mortals.
Warren Buffett is perhaps the best known living investor. Over his lifetime, he turned his stake in Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), what once was a struggling textile manufacturer, into a multibillion dollar insurance business and industrial conglomerate.
He made that happen through his world-class skills in allocating capital. In particular, he follows a value-focused investing strategy where he looks to buy shares of companies trading at or below a reasonable price based on their long-term earnings prospects. He also generally lets the companies he owns continue to operate, but he gladly collects their dividends and adds them to the capital he deploys to buy even more shares.
His strategy is still available today -- in a slightly different way
Buffett got his start investing in the early 1940s. At the time, there wasn’t much automation in the stock market. That made it easier for investors to seek out clear cases of deep bargains among companies. While widespread information about companies and their financials and automated trading systems have now made those deep deals rarer, today’s investors can still follow much of his strategy.
After all, those same automated trading systems that can move stock prices faster than any human can react also tend to be overly focused on short term news. If a normally solid company runs into a temporary rough patch, those same automated systems can quickly knock its stock price down. Value-focused investors with a longer term time horizon can then swoop in and buy its shares and wait for the short term bad news to pass.
Along those lines, one of Buffett’s most famous investments, for instance, was when he bought shares of American Express (NYSE: AXP) during the salad oil scandal in 1963. In essence, American Express’ shares were knocked down into deep value territory when it was discovered that a company it was financing was dramatically overstating the amount of product it owned. Because American Express had vouched for that other company’s financials, it looked to be on the hook for losses and damages.
Buffett recognized the long-term strength that American Express had, despite those short-term challenges, and he bought a significant stake in the company. Within a few years, the investment grew so large that Buffett was forced to pare it back because it hit too large a share of the assets under his control.
In a world where information moves and computer trading algorithms react far faster than any human being can, it’s those kinds of situations that are still available to investors looking for deep discounts. In the absence of a significant issue temporarily knocking down the price of a company, we mere mortals can still often find companies around fair value.
Get paid for your patience
In that case, the other key tool in Buffett’s collection -- collecting dividends -- can go a long way towards helping us mere mortals thrive despite the lack of readily available deep discounts. Dividends represent direct cash rewards for the risks people take while investing. That cash generally gets paid based on the health of the business, not the mood of the market. As a result, it can be helpful in giving you money to invest in those bargain priced businesses when the market’s worries make them available.
If you look at the publicly traded companies held by Buffett’s Berkshire Hathaway, the largest holdings in his portfolio all pay dividends. Apple (NASDAQ: AAPL) yields just over 0.5%. Bank of America (NYSE: BAC) pays just over a 3.3% yield. The aforementioned American Express offers a 1.5% yield. Coca-Cola (NYSE: KO) -- another famous long-term Buffett holding -- pays out around a 3.1% yield. Chevron (NYSE: CVX) pays out a yield around 3.6%.
Together, those five stocks represent around 80% of the value of the holdings of public companies that Buffett’s Berkshire Hathaway owns. That they’re all dividend payers means that Buffett gets its share of the dividends they pay out, and then he can invest that cash in reasonable bargains when they appear. That part of his strategy is also available to us ordinary investors.
Put it all together, and the answer is clear. While deep values are tougher to come by these days, the rest of Buffett’s strategy is still one that patient investors can follow today.
In our latest EasyResearch feature, we have the awesome Chuck Saletta (contributor to Motley Fool) sharing some fantastic insights on Exelon. Just to keep you in the loop, at the time of publication, Chuck did not own shares of any company mentioned in this article.
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