buffet buys train set, dumps cowboy outfits

7th November 2009

Old Warren buffet sat on a tuffet/ Buying the Santa Fe

A man for the detail/ He got out of retail

And squirrelled his profits away

Most of the business media watching stocks guru Warren Buffet over the last few months have labelled him a man buying into US recovery. Indeed (as a self-confessed patriot) he's said the same thing himself. I doubt if he believes this tosh any more than I do, but when a bloke is as influential as Buffet, he's virtually a one-man self-fulfilling prophecy at times: what's good for Warren automatically becomes good for the stockholder.

As always with such questions, however, one benefits from looking at the man's behaviour rather than his sound-bites. Mr B is not buying into American recovery, he's doing what he always does: analysing management abilities, watching likely business futures, and focusing on his next move rather than mindless short-term interference. As such, Buffet is the living embodiment of what nby would like all remote shareholders to do - use their brains and take the long view - but he is a one-off.

The fact that he is a one-off making piles of money recession in, boom out ought to occur to the other twerps providing finance for business, but it never does. There are good and clear reasons for this, but we've been there before and it's a diversion from the point of this article viz, watch the behaviour of those who keep their heads, and you'll never lose your shirt.

When Buffet started buying into Santa Fe, the overwhelming reaction of seasoned observers was 'A railroad? The guy's buying a railroad?' If they read the company report they'd spot that what he's buying is a management team who invest in their transport form, keep costs down and have good ideas for improving the product-experience.

This isn't all he's doing, of course. I suspect he's also buying into a business model that makes far more sense than anything in the airline business - and I'm certainly with him on that one too. His forays into the pharmaceutical sector are also based on sound reasoning: the demographics have gone older, folks are living longer, we've entered anxiety-producing times, and everyone gets headaches. Finally, he's dumped most of his retail stocks, knowing as many of us do that rising savings ratios and the internet will kill most of the sector as we know it in the end. (That said, just watch him buy a well-run survivor as when the smoke clears and the mirrors are taken out).

But perhaps what very few have spotted is that Big B's investments enjoy a perfectly inverse correlation with what the US government is supporting - the banks, the automotive industry, and the Dollar. The boys in Washington manage decline, whereas Buffet bets on growth. This is what financiers are supposed to do, and it's the one function that every bank gaily surfing along the New Paradigm until eighteen months ago completely forgot about.

You can argue that Santa Fe's rising price in recent months shot Buffet in the foot when he came to acquire the rest of it. Well, I wouldn't: I think a very clever man with abundant foresight and the patience to read key data took a limited investment risk, saw he'd been right, and then did the Victor Khayam thing as soon as he was sure his judgment was sound.

Listen to what Warren Buffet says at your peril: like everyone on this earth, he's got something to sell. Instead, watch what he does - and learn something. Not just for your own good, but also as an example of how things could be run within the capitalist model if there were more people like him.

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