Warren Buffett was in the media spotlight Friday, starting with a visit to the floor of the New York Stock Exchange and then a series of media interviews on CNBC and Bloomberg News, among others. With his usual quirky humor, Buffett shared his thoughts on taxation, the economy and the stock market. Leaving politics aside, let's focus on his nuggets regarding the future for investors and the economy.
While many economists suggest that the likelihood of a double-dip recession is elevated, Buffett thinks otherwise. He says that he looks at data from 70-plus businesses in Berkshire Hathaway's (BRK.B) universe and all of them are slowly coming back (except for those related to construction, which still scrapes the bottom).
Buffett is acting on his optimism. In the third quarter, Berkshire spent some $4 billion buying stocks, up from $3.4 billion spent in the second quarter. Those third-quarter purchases were the most Berkshire spent for equities since the $3.6 billion in purchases it made during the third quarter of 2008.
Perceptive investors will note the dates above: Buffett does not time markets and never has; instead, he values businesses relative to their future intrinsic values. Berkshire's purchases in the third quarter of 2008 came, on average, six months before the markets hit bottom and turned higher. Later in October 2008, Buffett penned an op-ed piece in The New York Times, essentially telling readers that he was buying U.S. equities. The markets nose-dived for the next five months, and Buffett was criticized for his ill-timed suggestion. Then the markets rallied nearly 100%.
So here we are again, with Buffett buying as market pessimism grows. The odds are that his buying is, once again, a little early. We won't know for sure what Berkshire bought during the third quarter until mid-November, but in the second quarter we know that two new purchases were MasterCard (MA) and Dollar General (DG). Both have done very well over the past several months, so it's uncertain if Berkshire made any substantial additions. But it's likely that Berkshire added to one of its favorite holdings, Wells Fargo (WFC), which has fallen in price over the past couple of months as investors sold off financials.
During the Bloomberg interview, Buffett said that Bank of America's (BAC) troubles will take a long time to clean up, more than a year, but "the underlying business is doing fine." For investors who want to make a long-term bet on BofA, I suggest considering the January 2013 $10 calls, which are trading for $0.75. Even though Buffett believes that BofA's problems will take more than a year to fix, the stock price could rise well ahead of that in anticipation of a recovery. Another option is to wait a few months for the January 2014 options to come to market and play that time frame.
Buffett's not hiding the fact that the economy is weak. Rather, he is thinking like a businessman. Certain businesses are performing well while valuations have come down. His long-term horizon allows him the opportunity to buy now. Investors should also keep in mind that Buffett has a ton of cash to put to work, a wonderful luxury to have today. This is certainly not the time to invest your final 10% to 20%. But with each day that the market declines, your odds of investment success increase.