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IF this were the 1930s, we might go to the movies and see a gaudy, escapist musical to feel better again. Instead, let’s pretend we’re Warren Buffett.
Most of us have no chance of being a billionaire, even if it rains pennies from heaven. Still, we may be able to feel like billionaires and nudge our net worths higher by thinking and acting with our money as he does with his. It’s easy in theory: Mr. Buffett accumulated his fortune by investing only in businesses he understands, buying shares when they were cheap and holding them for a very long time. It sounds like plain old common sense, and it is. Where things become tricky is in the execution.
Small investors may be unable or unwilling to devote the time to make informed stock picks. Even if they do, they may have trouble summoning the discipline or guts to put up money at times when others are selling in panic.
A comparatively error- and worry-free approach is either to buy what he buys or buy a piece of Mr. Buffett, or rather his corporate alter-ego, Berkshire Hathaway. Berkshire is the holding company for his operating entities, notably the insurers Geico and General Re, and more passive investments like American Express and Coca-Cola.
Berkshire took substantial positions last month in two worthy candidates for a Buffett-inspired portfolio: General Electric, a conglomerate with leadership in segments as diverse as heavy engineering, home appliances and finance, and Goldman Sachs, which has been forced by hard times to become a deposit-taking bank but retains a reputation in investment banking.
The stakes that Berkshire took, $3 billion in G.E. and $5 billion in Goldman, are noteworthy for their terms. The deals are for preferred stock paying 10 percent interest, which seems extremely generous, especially for G.E., which throughout the credit crisis has retained the highest possible rating that a corporate borrower can have. Mr. Buffett also acquired warrants to buy an equivalent amount of equity in each company for the next five years at slightly below recent prices. That gives him a one-way bet on a recovery in the stocks.
Susan M. Byrne, chief investment officer at Westwood Holdings, finds these deals so favorable to Berkshire that she would rather own it than G.E. or Goldman. Mr. Buffett “waits until he can drive the very best bargain,” she said. “I prefer to let him negotiate for me by owning Berkshire shares instead of being on the other side and having to pay him 10 percent.”
Being conservative has left Mr. Buffett awash in cash. Having a commodity companies need, some of them desperately, allows him to win such favorable conditions. He also has something that no one on Wall Street does: his name. Companies give him better terms in the hope that having him as a creditor or shareholder will attract other investors.
JOHN BUCKINGHAM, chief investment officer of Al Frank Asset Management, is a bit jealous. “If I could get 10 percent on a triple-A preferred, plus warrants, I’d do that all day long,” he said.
He views the latest deals as good news and bad news for the companies. They show that Mr. Buffett has faith in the companies, but Mr. Buckingham laments the need for such top-notch businesses to “resort to an Uncle Louie type of financing.”
His misgivings do not prevent him from owning G.E. and Goldman. Mr. Buckingham is a value investor, and he considers the stocks, which trade at less than 10 times earnings, extremely cheap. Berkshire Hathaway, by contrast, is too expensive in his view, at more than 20 times earnings.
Thomas H. Forester, manager of the Forester Value fund, was a recent buyer of G.E., and his portfolio includes earlier Buffett investments like Kraft and Wal-Mart. He deems other Berkshire holdings, including Amex, Coke and Procter & Gamble, “a little pricey.” The same goes for Berkshire itself. Doing his best Warren Buffett impersonation, he explained why he would not buy the stock at its present valuation.
“You’re paying a star premium,” Mr. Forester said. Mr. Buffett “is fantastic, and he’s done a fabulous job, but being a value investor, I don’t like to pay premiums for things.”