I Think Warren Buffett Would Like this Situation

Wednesday I blogged on the virtues of “benign neglect,” which is my cute way of saying that we should take a long term view of our investments. I used Warren Buffett as an example and closed with some appropriate quotes from him about investing for the long term. Now by definition, good long term opportunities don’t pop up every day, but one did so just this morning so I wanted to share it with you. I have to emphasize, in keeping with my general policy and disclaimer, that this is just an example to illustrate my point, and not an offer or a recommendation to purchase.

Just this morning, General Electric announced poor quarterly numbers, and lowered its guidance for fiscal 2008 by a few cents per share. The poor performance was partly the result of some subprime exposure, but according to CEO Jeff Immelt, “We could have done better in several areas.” The stock is being pounded today, especially because as recently as a month ago, Immelt was quite optimistic. Remember a point I’ve made in the past, “It’s Expectations that Bring Disappointment.”

So I have to ask myself, “What Would Warren (Buffett) Do?” Or what should any long term investor do? In my last article, I noted how poorly I’ve done over the years when I attempted to trade on news. That’s not entirely true. I did poorly when I attempted to beat the crowd, buying a stock on good news or selling it on bad news. This reflects the simple reality that by the time you and I hear about something, it’s already fully reflected in the price. This is the essence of what is known as the “Efficient Market Theory.”

But I HAVE done well when I have traded in the OPPOSITE direction of the news. Specifically, when I have used bad news as a buying opportunity to buy a good stock…. Just like Warren Buffett. So when a news item pops up like today’s news on GE, I like to look at it, and if it’s likely to be a short term blip in an otherwise steady uptrend, I’m a buyer. GE looks like it might be such a situation, with a modest P/E ratio, a 3.5% yield (which looks pretty good in today’s interest rate market), and a record of increasing dividends every year for 30 years.

And even if your research comes to a dead end, a lot of times the trail leads to other good situations. Already, in looking up GE, I’ve come across some interesting stuff, like this great blogger on dividends, and a list of 50 S&P “Dividend Aristocrats,” all of which have had dividend increases annually for over 25 years.

Did you notice that Warren Buffett offered to back $800 billion in municipal bonds through his reinsurance company in the midst of the subprime meltdown in January? This offer, which was not accepted, confirms that Warren is a buyer in today's fearful markets, which brings to mind one of the Buffett axioms we quoted on Wednesday:

"We simply attempt to be fearful when others are greedy
and to be greedy only when others are fearful."
It’s time to get greedy, I guess. - Bob


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