It Could Be Time To Jump On The Buffett Bandwagon

Warren Buffett is in the news again!

Well, I suppose in the world of Wall Street, Warren Buffett never really leaves the news but the information that came out of Omaha, Nebraska this past week is particularly noteworthy.

On January 26th, it was announced that Berkshire Hathaway, Buffett’s holding company, would be replacing Burlington Northern Santa Fe, the railroad that Berkshire recently acquired, in both the S&P 100 and S&P 500 indices. Buffett and Berkshire have long been likely candidates to join one of the S&P indices and this announcement proves significant to investors for a couple of reasons.

The first has to do with the performance of the stock itself and what is known as the “index effect”. This refers to the short-term price bounce that stocks joining a major index typically see as institutions and fund managers begin snapping up the stock to add to their own index fund products. Wall Street reacts fast though and it’s worth noting that Berkshire Hathaway’s shares (both “A” and “B” classes) have already jumped over 10% since the news broke.

The second reason is that Berkshire Hathaway’s shares just became more accessible to a lot more investors. Berkshire’s “B” shares underwent a 50-to-1 stock split in order to help finance the purchase of Burlington Northern Santa Fe – a split which resulted in the share price dropping from around $3,500 a share down to about $70. Berkshire Hathaway’s “A” shares, currently priced at about $112,000 per share, have been out of reach for most investors for a while now but suddenly through the “B” shares Warren Buffett’s expertise could be had for the price of a nice dinner for two. Intriguing, no?

If you’re a long-term investor, it makes sense to consider trusting some of your money to Warren Buffett. After all, Berkshire Hathaway has generated some phenomenal market-beating returns since Buffett took over. But by “long-term investor” I mean years and years. Buffett is well known for investing in companies and sometimes holding on to his stakes for decades. You should be prepared to make the same type of commitment if you plan on buying Berkshire shares.

The other question is one of value. We should probably disregard the potential for short-term returns because the stock price appears to have already reacted to the S&P 500 addition news along with the fact that Berkshire isn’t managed that way. Berkshire’s shares struggled last year as investments in financials, insurance companies and other cyclicals lagged behind the broad market so backers can argue that there is some value potential here. Buffett himself has even said that the current price-to-book ratio of the shares is as cheap as it’s ever been.

Does all this indicate a buy signal? As far as Buffett himself is concerned, although he’s not technically a Wall Street money manager you’ll be hard pressed to find an investment guy as talented as he is. Buffett is a throwback to the old school method of investing – find well managed companies that demonstrate exceptional value and hold on to them until that value is finally realized. In the current era of technical analysis and short-term returns, Buffett is a welcome reminder of how investing can be executed well.

If you have some cash sitting on the sideline waiting to be put to work, the Oracle of Omaha might not be a bad person to hand it to.

*Stock chart from MarketClub