Berkshire Hathaway recently made investment headlines with its agreement to purchase the power-transmission company Oncor for $ 9 billion in cash, a would-be coup for the legendary billionaire, as it would have chipped away at Berkshire’s bloated cash balance (of nearly $ 100 billion).
Disappointment, however, came in the form of Sempra Energy, which swooped in with an offer of $ 9.45 billion. This made headlines, some of which characterized the chain of events as a “stumble” by Buffett, even insinuating that the Oracle of Omaha might be losing his deal-making chops.
A recent article in Fortune quotes an equity analyst who argues that Berkshire’s loss of two large acquisition opportunities this year “calls into question the effectiveness of their gentleman’s agreement acquisition strategy,” adding that unless something in Buffett’s negotiating tool box changes, it’s going to be difficult to maintain his reputation as a savvy and shrewd bidder.
But this is hardly the first time Buffett has lost a deal, nor will it be the last. You can’t build a track record such as Buffett’s without your share of misfires, and the Oncor deal is not alone in that distinction.
To use one of Buffett’s favored baseball metaphors, you shouldn’t swing at every pitch, nor should you expect every pitch you swing at to sail out of the park. The difference in the Oncor deal is the public attention it has received, the sort of coverage that invariably triggers a flood of public opinion and broad speculation. Humans need to create stories, after all, as any expert in behavioral finance will argue.
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The fact that this isn’t Buffett’s first rodeo, however, isn’t even the point. Given what we know about his investment philosophy and approach (which inspired one of the stock-screening models I created for Validea), it’s safe to say that this guru investor is probably disregarding the press coverage.
While the hiccup does put a crimp in his plan to put Berkshire’s lofty cash balance to work for its shareholders, Buffett has made no bones about his intent to continue the deal search. (As a side note, it’s important to understand that Sempra has some hurdles to clear before bringing the deal to fruition, including both bankruptcy court approval and a green light from the Public Utility Commission of Texas, which nixed the last two advances for Oncor but approved Berkshire’s bid.)
Buffett’s concession in the Oncor deal underscores the legendary investor’s commandment of never going where he isn’t wanted, the same policy that ended the Kraft-Unilever deal earlier this year. And it’s safe to say that Buffett’s reaction to the recent toe-stubbing won’t be vastly different from his reaction when share prices in his portfolio lose value — he will neither react emotionally nor impulsively, and will instead move on to the next acquisition candidate and/or leave the bruised stocks alone. This is consistent with Buffett’s argument that time is the friend of a strong business. Fundamentals, he asserts, can take years to impact a stock’s price, and only patient investors will be rewarded.
“The stock market,” Buffett has said, “is designed to transfer money from the active to the patient.”
In the case of Berkshire’s share holdings, the fact that Buffett only purchases interests in strong, sustainable businesses allows him to keep a level head when market dips inevitably occur. From my nearly 15 years of studying Buffett’s approach, the following principles remain at its core:
1. Don’t buy a business you don’t understand. Buffett focuses his attention on simple, easy-to-understand businesses with reliable performance and strong bones. If he doesn’t understand a business, he says, “We go on to the next one, and that’s what the individual investor should do.”
2. Buy value. Buffett strongly believes that “price is what you pay; value is what you get.” He has made a fortune by investing in companies whose stocks are selling cheaply relative to what he sees as the intrinsic value of the underlying business. He looks for what he calls “durable competitive advantage” and an “enduring moat” as characteristics of a strong business.
3. Focus on the long term. Buffett has often been quoted as saying that Berkshire’s favorite holding period is “forever.” While not to be taken literally — he did sell some IBM only a few years after buying a huge stake in the tech giant as its shares have struggled — this statement is intended to underscore the benefit of long-term investing. Buffett believes that if you’re not willing to hold a stock for a long period of time, “don’t even think about owning it for 10 minutes.”
4. Trust yourself. Buffett is a firm believer in marching to your own drummer when it comes to investing. He says that “you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.” He advises against getting swept up in emotional and irrational behavior. If a business is solid, he believes the stock will follow.
By incorporating these principles into your investment process, you can take advantage of the philosophy and process that has helped Buffett become one of the greatest investors of all time.
— ByJohn Reese, co-founder of Validea Capital Management. His firm manages the Validea Market Legends ETF (VALX) and runs Validea Legends Advisor, a newly launched robo-advisor. The firm uses computer models based on legendary investor strategies for stock selection, including a Warren Buffett model.