How Buffett is playing this market

By Michael Brush

As oracles go, Warren Buffett doesn't talk much. The renowned value investor is famously secretive about his maneuvers.

In a round of December appearances in support of Sen. Hillary Clinton, for example, Buffett deftly dodged questions about what he'd been buying as stocks crumbled.

But actions speak louder than words. And Buffett's recent actions provide four key takeaways for investors:

• In the long run the U.S. economy will be fine, so it's time to start nibbling on cyclical names that have been hit too hard by fears of economic Armageddon, like railroad stock BNSF Railway (BNI, news, msgs).

• Basic manufacturing stocks may be buys here for the same reason.

• Get international exposure to benefit from the weak dollar and foreign economic growth.

• Avoid the financial sector.

Here's a closer look at the Buffett tea leaves.

All aboard!

Since early December, shares of BNSF have gone off the tracks. The stock has fallen more than 11% to trade recently at $77 a share, roughly a 52-week low. Last week, Buffett took advantage of the weakness and pounced on the stock. You'd do well to follow his lead for three reasons.

First, a recent study by American University Kogod School of Business professor Gerald Martin examined how fast your money would grow if you simply purchased each Buffett stock a month after his investment company, Berkshire Hathaway (BRK.B, news, msgs), disclosed ownership. The result: You'd earn a cool 14.26% a year.

Now for some more good news. You can still buy BNSF for the same price Buffett got -- or better. Berkshire Hathaway picked up $228 million worth of the stock for around $77 to $78 a share between Jan. 10 and Jan. 18, according to InsiderScore.com. Buffett first reported a position last April, when the price was higher than it is today. Berkshire Hathaway now holds 18% of the company.

Second, BNSF has one of the key advantages that often explain Buffett's magic touch with stocks. Since it's hard to create a railroad, companies like BNSF enjoy pricing power and protection from would-be competitors.

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BNSF "is a toll collector with a huge moat and high barriers to entry. You can't duplicate these franchises," says Stephen Shueh, the president of Alter Asset Management, a value investor who studies Buffett closely and owns shares of the railroad. For deeper analysis of Buffett's railroad play, see my column "Buffett on right track: Buying rail stocks."

Third, since Buffett loves betting against the crowd, I'll take his BNSF purchase as a signal that the market may be overreacting to signs of weakness in the economy -- which at some point will return to solid growth, pushing stocks back up.

"It is the nature of capitalism to periodically have recessions," Buffett said in a CNBC interview in December. "It isn't the end of the world. As a matter of fact, for an investor it turns out to be the times when you make your best buys. The American economy is going to do fine over time."

Exposure to manufacturing abroad

In late December, Buffett plunked down $4.5 billion to purchase 60% of a little-known industrial conglomerate called the Marmon Group. That used up nearly 10% of Buffett's cash position, no small purchase.

What can we learn about Buffett's thinking from this move? Marmon is a conglomerate that makes mundane but essential industrial products such as wire and cable, railroad tank cars, specialty pipe and tubing, metal fasteners and food-preparation equipment. It has plants in North America, Europe and China.

Continued: A common Buffett theme

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