Business Blog: Hoover’s Business Insight Zone

Catching up on some reading the other day, I came across this Wall Street Journal article (subscription required) about how Berkshire Hathaway chief Warren Buffett has been taking advantage of the current swoon in the credit markets. There’s a predictable flow of sentiments from the financial world toward Buffett: against a background of constant respect, Buffett is regarded as overly staid during market booms, but then he’s seen as even more of a financial wizard when the markets go to pot.

This happened during the Internet bubble of the late 1990s, when Buffett eschewed ownership of online or high-tech companies because he claimed he simply didn’t understand those lines of business. Buffett is disciplined enough that, if he doesn’t know how to assign an accurate value to an asset, he doesn’t buy it. In the case of the Internet bubble, this meant that he avoided fallout from the spectacular collapses of Pets.com and the rest; meanwhile, his old-line assets like Acme Brick and building-supplies maker Johns Manville just kept chugging along, boringly posting profits year after year. In the past couple of years there has been some noise for Berkshire to disperse its extra cash as dividends, but Buffett has resisted these payouts because he believes that Berkshire can make more money for its investors in the long run by having cash available to invest on their behalf when markets are favorable.

Which brings us to today. During this round of market suffering, Buffett is sitting on a pile of cash — nearly $50 billion — that he can use to buy discounted assets, whether that means stocks, bonds, or whole businesses. Bargains are available because the credit crunch now underway has tightened banks’ willingness to lend money to the usual buyers of the past few years, including hedge funds and private equity shops. That means that Buffett is now running one of the best games in town for asset owners looking to sell. All of this makes Buffett happy because he loves bargains.

As the WSJ article points out in passing, Buffett’s standing also provides a luxury for Berkshire that many other buyers don’t enjoy: the company “doesn’t participate in auctions.” This means that Buffett need never suffer the “winner’s curse” common to auctions — that is, he never ends up “winning” an auction by agreeing to pay more than an asset is worth.

The Journal article touches upon one more thing that has marked Buffett’s business approach for decades: when the time is right, the Wizard of Omaha is able to move billions of dollars at a moment’s notice. The fact that Berkshire doesn’t do a lot of rapid buying and selling is one more testament to the discipline of Buffett, his business partner Charles Munger, and their lieutenants. But it does not mean that the company can’t pull the trigger quickly when conditions dictate.

Expect much more trigger-pulling from Berkshire in the months to come. Warren Buffett is ready to do business at a reasonable price any time, but he absolutely loves a buyer’s market.