StreetTalk: The Buffett Way 2006 - All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies - BioPharm International


StreetTalk: The Buffett Way 2006
All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies

BioPharm International
Volume 19, Issue 7

One big trend that I've studied extensively this past year is in commodities, especially gold and silver trading. But Buffett and Munger will have none of it, even if precious metals have posted huge gains in 2006. "We have failed to profit from one of the biggest commodity booms in history and will probably continue to fail in that way," said Munger in Omaha. Buffett agreed, saying that, sooner or later, their patience will pay off. "Being contrarian has no special value over being a trend follower. You are correct because the facts are right. In focusing on business and investment decisions, look for things that are important and knowable."

"[Remember] the market is there to serve us, not instruct us. It just tells us prices. If something is out of line, then you can do something about it—the critical part is how you handle that piece of information; how you play out your hand. Let the market serve you rather than instruct you and you can't miss."

This year, the investment tenets of Buffett and Co.—patience, integrity, and value, were on display in spades. This year Buffett had to deal with an excess of cash, an issue every year, but in 2006, Buffett had about $40 billion in cash on the table.


Scouring the globe for a place to stash some of that money, Buffett found Iscar, an Israeli toolmaker that Berkshire purchased for $4 billion. Buffett told his audience in Omaha that there was one radical departure involved in the Iscar buy. "It's the first business we've purchased that's based outside the US," Buffett said. "I think we'll look back on this in five or ten years and see this as a very significant event in Berkshire's history."

But it's difficult to go overseas and to find good, inexpensive opportunities to turn Berkshire's unwieldy $130 billion market cap into significant profits for shareholders. Interest rates are still relatively low and don't offer much of a financial payoff for cash investments; the dollar is in decline (and will be for years to come, Buffett said).

Myriad moves by a growing number of hedge fund companies in America toward buying domestic companies make it hard to find good US companies at reasonable prices. Buffett prefers to buy small, publicly traded companies with ample room for growth. Hence, he moved overseas, with Israel as his first stop.

Iscar has its advantages. The company earns most of its cash in non-US dollar currencies, a fact that no doubt pleases the dollar-averse Buffett. With few hedge fund operators looking over his shoulders to outbid Buffett overseas, he was able to buy the company without a nettlesome bidding war and could put $4 billion in cash to work right away.

The Iscar move indicates a trend toward Berkshire buying into companies with solid global operations. Buffett amplified that notion when he bought into equally solid global firms like ConocoPhillips, General Electric, Wells Fargo, and United Parcel Service. Buffett has also purchased a big stake in Tesco PLC, a UK-based retailer. This fuels observations by analysts that Buffett is buying into companies that have great global prospects, hinging on his belief that massive US trade deficits will further weaken the dollar.


While Iscar and Tesco represent a notable departure for Buffett and Berkshire, few Buffett followers believe that he's done with US companies. The buzz at the Omaha meeting was that Berkshire had its eyes set on two brand-name US companies: Harley-Davidson, Inc., and Mattel, Inc. Both satisfy Buffett's criteria of having a market value of $5 to $20 billion, according to a review by Bloomberg News.

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