Is this Buffett's best run ever?

By Michael Brush

If you listened to the pundits over the past two or three years, you might have thought investing legend Warren Buffett had lost his chops.

But the last laugh belongs to the man from Omaha. In fact, as one of his key deputies, David Sokol, said on CNBC last week, the past 18 months may have been his best ever.

And they've shown us a different side of the famed buy-and-hold, value-investing genius -- a side that was aggressive and even predatory in taking advantage of the market crisis.

While everyday investors can't copy his most successful recent moves, we can all learn from how he's handled the crisis -- and make some money buying his stock or some of the ones he's been buying.

Well, he seemed out of sync

The criticism went this way: Buffett's big problem was that he had stayed in cash too long while other investors enjoyed go-go returns during the real-estate bubble. Then, with the market down and the bubble deflating, Buffett got bullish too early. He proclaimed his bullishness in an October 2008 New York Times commentary, right before the markets took another deep dive.

By the start of 2009, it was open season on Buffett. Investing pundits such as Douglas Kass publicly declared that Buffett's "salad days" were over and that the value of Buffett's Berkshire Hathaway (BRK.A, news, msgs) would "steadily suffer" with such a has-been at the helm.

Since then, Berkshire Hathaway's stock has advanced about 15%, though it's still lower than when the crunch began.

But more importantly, during the dark days of the credit crunch, Buffett was one of the few investors around with cash, because his discipline had kept him away from disaster.

He used his cash to "plant the investment seeds for very attractive long-term returns," says Justin Fuller, a partner at Midway Capital Research & Management who writes regular commentary on Buffett at Buffettologist.com.

Indeed, as the smoke clears, a fresh image of the investing genius of the Oracle of Omaha is emerging in a series of deals that will benefit anyone who buys Berkshire Hathaway stock now.

His most recent headline-grabbing deployment of some of his vast cash hoard played out earlier this week when Buffett bought the rest of Burlington Northern Santa Fe (BNI, news, msgs) -- the 77.4% of the railroad he did not already own. This move served as an "all in" bet on the future of America, Buffett said in announcing the deal.

The Bank of Buffett

His best move during the credit crisis? A huge loan to troubled Goldman Sachs (GS, news, msgs), arranged in late summer 2008, when few investors would touch anything at all in the financial sector.

Highlights of the deal:

• Buffett locked in a 10% annual return on $5 billion he lent the Wall Street bank. Buffett gave Goldman the money in exchange for preferred stock, a hybrid of stock and bonded debt. In contrast, most investors will probably have to settle for ridiculously small returns on cash savings because the Federal Reserve is keeping interest rates near zero.
• Buffett negotiated an option to buy 43.5 million shares of Goldman at $115 per share anytime he wants during the next four years. Buffett is already up $2.4 billion on that part of the deal, with Goldman stock recently selling for $170.

Not bad for a guy who was all washed up.

Buffett negotiated no fewer than five major deals like that when the frozen credit markets temporarily turned him into the de facto lender of last resort, says Stephen Shueh, a partner at Roundview Capital, a value-oriented investing company based in Princeton, N.J.

Besides assisting Goldman Sachs, Buffett lent to strapped General Electric (GE, news, msgs) and Swiss Re (SWCEY, news, msgs), an insurance company. His funding helped British candy company Mars buy Wm. Wrigley Jr. and helped Dow Chemical (DOW, news, msgs) purchase Rohm and Haas. He also made smaller but equally favorable loans to Harley-Davidson (HOG, news, msgs) and Tiffany (TIF, news, msgs).

Despite Buffett's aw-shucks, regular-guy image, he used his position of strength to exact what looked like predatory terms when borrowers had few options.

Merely accepting opportunity?

Buffett aficionados caution against calling him predatory, of course. They say Buffett was only doing what he does best: exercising discipline to avoid blowing money on frivolous bets so he'll have plenty of cash around when others need it the most -- and will pay him the most to borrow it.

"My sense is he's not out running around looking for people in trouble and saying, 'Call me if you want to get burned,'" says Larry Coats, Jr., a co-manager of the Oak Value Fund (OAKVX). "He's often said he sits by the phone waiting for it to ring. Typically, people tell him what they want to do, and he says yes or no."

Video: David Sokol on Buffett's great run

Coats describes Buffett as opportunistic rather than predatory.

­Though Buffett's easiest profits will come from these loan deals -- often with options attached to buy the stock of the borrower at favorable prices -- Buffett also made some particularly savvy moves in stocks.

During the first quarter of this year, when so many investors were dumping stocks, Buffett added to positions in Wells Fargo (WFC, news, msgs), US Bancorp (USB, news, msgs), Burlington Northern, Union Pacific (UNP, news, msgs) and Nalco (NLC, news, msgs), a water-treatment company.

We don't know exactly the prices Buffett paid, but all of those stocks have done very well since his purchases. The two banks have tripled from their lows in March. Nalco has doubled. And the two railroads were up 50% to 60% before Buffett moved them even higher by purchasing Burlington Northern.

Continued: Buying stocks like Buffett

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