Friday, January 14, 2005

BUFFETS BIG BONDS

Warren Buffet is one of the most successful investors of all time. He is the second richest man in America and he made his money through investments; a rare breed.

Buffet operates a holding company--Berkshire Hathaway Inc. (BRKA). He does not believe in stock splits. The stock currently trades at $86,089 per share.

Three years ago, when corporate bond spreads were high, it was reported that Buffet was very heavily invested in high yield corporate bonds. No doubt he made good money. Today it was reported on CNBC that his company just issued 3.5 Billion Dollars worth of bonds!

It is always good to be on the same side of the market as Buffet. I don't have the ability to sell a new bond issue but I can certainly avoid buying bonds. Yesterday, I wrote about the way investors are being talked into buying "hybrid" bonds. I agree with Buffet, bond rates are low. One should avoid tying up money in fixed rate securities of any type.

At a time when major American companies such as SBC are paying 5% dividends, 85% income tax free, why invest in high yielding securities that are high yielding only because they expose one to interest rate risk and credit risk.

Yesterday I used the term "relative strength" again. Relative strength is a simple concept. It the overall market is going down but a certain stock or sector is not going down as much, then the stock or sector is relatively strong.

GOOG is currently a good example of relative strength. Since the first of the year, when the correction started, the overall market has gone down but GOOG is trading at about the same price. This is a very positive sign for the stock.

Traders can "paint" the tape which means that they can trade a stock back and forth up quickly and down quickly to attract buyers. GOOG is trading at a steady price. Those who like to buy on pullbacks are not getting the chance to buy.

One point that I keep trying to drive home is that although brokerage firms are pushing all kinds of "derivative" or "secondary" investments, one can buy good old American companies and enjoy solid returns while avoiding layers of fees.

Yesterday, when I listed keeping your costs or over-head low as being one of the keys to making money, I failed to mention the idea of trading very little. If you buy 200 shares of a $20 stock, pay a total commission of $5 and hold the stock for many years to come, you over-head is extremely low. If you buy the same amount of the same stock in a commission free or no-load mutual fund, your cost might be $60. However, if the stock goes up, you will pay more than $60 the second year and more the third. Over a 10 year holding period, you might pay $1,000 or more versus $5.

There is nothing wrong with paying a broker for advice. Unfortunately many customers pay for advice they do not use or they pay a lot more than they realized.

Buffet is not always the most popular guy in the brokerage community. By not splitting his stock, he reduces the speculative trading on the stock. Buffet buys value. It was just reported that he just sold 3.5 BILLION BONDS!

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