Listening to ‘Uncle' Warren Buffett Pays off Handsomely

Posted: Mar 08, 2014 12:01 AM

Earlier this week, we were hit with yet another winter storm here outside of the Washington, D.C., area, and, true to form, many things came to a girding halt. We can add this to the other winter storms that have taken their toll on the economy in the current quarter, but as I shared with subscribers to my PowerTrend Profits investing newsletter, most of that will be temporary. As we have seen in the past, this slowdown likely will create a burst of pent-up demand once the warmer weather rolls around.

During my snowed-in time, I was fortunate enough to have some interesting reading. One key data point I gleaned was a very robust purchasing managers' index (PMI) reading for the U.S. economy. The February reading from Markit Economics showed a significant month-over-month jump in output, new orders, backlogs and new export orders. All told, it was the strongest month for manufacturing since May 2010, despite the impact of the winter storms. I continue to see signs of pent-up demand in the short term that should give a boost to domestic manufacturing.

At the same time, the euro zone continues to recover as its pace of manufacturing has continued to expand, with February marking the eighth consecutive month of expansion for manufacturing output, new orders and new export business. An even broader view of global manufacturing offered by JP Morgan came in at a reading of 53.3, a 34-month record and higher than the 53.0 January figure. On that global basis, JP Morgan found that global output remained on track, but new order activity rose in February compared to January.

That tells me the global manufacturing economy is doing better than is being talked about by all the pundits and talking heads on TV.

We also had the annual treat that is "Uncle" Warren Buffett's annual letter to shareholders of Berkshire Hathaway (BRK.A). I've read and re-read many of his letters over the years for both insight and entertainment, and if you've missed them, you can find them on Berkshire Hathaway's website or pick up Mike Olson's book "Berkshire Hathaway Letters to Shareholders." This year's letter was once again filled with wit, wisdom and humor. If you have not yet seen it, I highly recommend that you read it.

Uncle Warren and his team have achieved this by being value investors who look for businesses and securities with prices trading below their intrinsic value. That value is determined by analyzing a company's business fundamentals. More than just determining whether an opportunity is underpriced by the market, Buffett and his team also look at the overall potential of the company and how well that company can make money as a business. As such, these investments tend to be longer-term in nature, and Buffett has been rather open about his views on what the stock market may or may not think about his team's investments.

Subscribers to my investment newsletter PowerTrend Profits will say this sounds very familiar.

Is this the only style of investing? No. Is it for everyone? No. It takes many different investors and traders to make a market, but given the performance by Buffett and his team, I think many would be hard pressed to argue that when Warren Buffett talks, it makes sense to ponder what he says.

Some of my favorite quotes by Buffett include:

"The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch."

"'Price is what you pay; value is what you get.' Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

"The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they're on the operating table."

"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

There are many other pearls of wisdom from Uncle Warren and more than a few humorous ones along the way. Those quotes above are my favorite because they reflect my mindset when picking recommendations in PowerTrend Profits, where we will buy the right company at the right time and not before, but we will hold it as long as the investment rationale continues to make sense.

How's that working for us? As I write this to you, subscribers to PowerTrend Profits are up in 11 of 13 positions, with eight double-digit percentage returns and one that is up nearly 90%.

It seems to me that Uncle Warren is onto something.

In case you missed it, I encourage you to read my PowerTrend Brief posted last week on Eagle Daily Investor about how rising prices will affect retail and restaurant recovery.