Which Buffet Should You Listen to?

Everyone loves to quote Warren Buffet when making an investment argument. You hear it all the time. Do these quotes sound familiar?

“Our favorite holding period is forever”

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

“Price is what you pay. Value is what you get”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years”

from Wikipedia

When you see these quotes and think of Buffet, which investments of his come to mind? Do you think of Coca Cola? I’m sure many readers here think Buffet made all his money buying companies like coke or Burlington Northern. But the truth is, Buffet built his wealth buying companies that at the time, few had heard of. He also had a “trading strategy” that he used when he couldn’t find a good investment idea. Yeah Buffet as a trader – most wouldn’t call what he did “trading,” likely because we’re talking about Buffet – Mr Long Term Investor – but Buffet engaged in Merger Arbitrage, which is a form of short term investing/trading that tries to take advantage of the difference in price of an announced buyout and the current price.

Back in the 1950s and 1960s, the spreads in merger arbitrage were sometimes large. And few outside of the professional money management field engaged in this activity. Now it is so popular, there are mutual funds that try to do it – and because it’s so popular, that spread is often tiny and funds take a bit more risk in what they call “merger arbitrage.”

When he wasn’t doing merger arbitrage he was doing things like finding small companies with market values far below the value of cash they had in the bank! And then loading up a significant portion of his firm’s capital into these stocks (it wasn’t unlike Buffet to put 30-50% of his funds into an idea). And when he started taking over insurance companies like GEICO, he concentrated their portfolios into a few stocks that he liked, instead of diversifying among the hundreds of investments in the way a typical insurer would invest.

So when deciding to invest “like Buffet,” you have two choices – the younger Buffet who was trying to become rich, and the older Buffet who is trying to build capital safely over a long period of time. Young Buffet bought 2-3 stocks and had a trading strategy for idle cash, older Buffet keeps his money in cash until a good opportunity that is large enough for all of his cash comes along then he buys big. Younger Buffet didn’t “hold forever” and always invest in “great management” or “great companies at a fair price.” ¬†Older Buffet does these things (in fact¬†Berkshire Hathaway was a good example of a bad company at a great price).

For more information on young Buffet, read his partnership letters from the early days HERE

For more information on older Buffet- just search the internet – there’s too much out there.

But don’t make the assumption that Buffet got rich by buying large companies with good management and good cash flow. Learn what he did in those partnership letters – and then drop a comment with reactions below!