What Buffett is Buying

Written By Briton Ryle

Posted March 12, 2014

Worried about your investments? Afraid the U.S. economy is one giant bubble waiting to pop?

Well, there’s no better medicine than some assuring words and perspective from one of the world’s greatest investors.

Yes, Warren Buffett’s annual shareholder letter hit mailboxes last week, and, as usual, it was chock full of investment gems. And I’d like to share a few with you…

Now, let’s be clear from the outset that Buffett is a special case. The amount of cash he has and the amount of respect he gets means he can cut investment deals that are unavailable to the rest of us. So, it’s just not possible to follow his investment strategies to the letter.

Still, we can certainly benefit from his insights on investing.

I run The Wealth Advisory income/dividend newsletter. And I see letters all the time from readers who want to know if they should sell everything because interest rates may rise, or the U.S. dollar may crash, or a rash of solar flares may disrupt the harmonic convergence of the stock market.

Okay, nobody really asked that last one — Wealth Advisory readers are a savvy bunch, and their insightful questions often require a few hours of research to answer properly.

Anyway, here is perhaps the most important tidbit from Buffett’s 2014 letter:

“Charlie and I have always considered a ‘bet’ on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.”

I always love Buffett’s perspective on America. He is steadfast in his view that America offers endless investment opportunity. Regardless of how you feel about Obama, or Congress, or the Fed, the U.S. is still head-and-shoulders above any other country in just about any category: innovation, creativity, opportunity, investment potential, etc.

And Buffett isn’t just talking his book here; he puts his money where his mouth is:

“Our subsidiaries spent a record $11 billion on plant and equipment during 2013, roughly twice our depreciation charge. About 89% of that money was spent in the United States. Though we invest abroad as well, the mother lode of opportunity resides in America.”

Sure, America has its problems right now. In fact, there have been very few moments in history where we weren’t confronted with significant problems. But we almost always work them out. And if you avoid investing because you think it’s somehow different this time, you’re going to miss out.

For the last few years, we at The Wealth Advisory felt the same about investing in American stocks. We have a few token international investments (like Banco Santander (NYSE: SAN), +47%, or Alpine Global Property Fund (NYSE: AWP), +31%), but the lion’s share is in U.S. equities. After all, where would you rather put your money? Europe? China? Brazil?

One more thing about this quote: Buffett is telling us that he is investing more (CAPEX) in his current businesses. This is significant. American corporations have record amounts of cash. But they’ve been spending it on share buybacks instead of growing their businesses because demand is very slack.

This CAPEX (capital expenditure) spending is a big “missing piece” for employment and the economy in general. There is a very good chance that 2014 is the year CAPEX improves, helping to push GDP growth above the elusive 3% threshold.

To finish the U.S. investment theme, there was this chestnut:

“During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling… why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the Earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?”

As a newsletter writer, this next one seems like a direct attack:

“Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

He’s right, of course. It’s critical to have your own opinions, expectations, and plans. I do hours of research and plenty of my own analysis. But some of that involves reading other analyst and strategist commentary. If nothing else, it helps keep my BS detector in shape…

“Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America (NYSE: BAC) at any time prior to September 2021 for $5 billion… it is important for you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly.”

In August of 2011, Buffett bought $5 billion worth of preferred stock from Bank of America (NYSE: BAC) and got warrants enabling him to buy 700 million shares of BAC common stock at $7.15 a share. This is a prime example of how Buffett can use his influence to make sweetheart deals.

Clearly, none of us can get the same terms as Buffett. But we can pay attention when he makes a value investment.

My Wealth Advisory subscribers are up 88% on our position in Bank of America. And if you’ve been reading Wealth Daily for a while, you may have bought shares between $11.10 and $11.36 when I recommended the stock here about a year ago. That would have been worth a solid 55% to you.

I sure hope you took advantage of that. If not, don’t worry — you’ll be getting many more chances to profit from strong U.S. stocks.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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