Buffett surfs tsunami

From his 2009 letter to shareholders

..We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall,"

Buffett warns of financial engineers, planners and the like

Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

Says Mark Sellers, managing partner of hedge fund Sellers Capital LLC

"He dove in too fast and probably wishes he had waited a few months...He hoarded cash for years, waiting, waiting, and then used a lot of it very quickly. No one, not even Buffett, can call the bottom."

Buffett agrees

During 2008 I did some dumb things in investments...I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

Jim Cramer from TheStreet.com writes

" I'm struggling this morning with some of the things that Warren Buffett is doing with his cash these days. I am struggling because he is selling America, selling Johnson & Johnson and Procter & Gamble, selling ConocoPhillips and selling U.S. Bancorp.

What's more American than these stocks? These are not small trimmings. He sold more than half of his 52 million shares of Johnson & Johnson and he sold it at a 20-year low relative to its yield. That doesn't sound like "Buy America." That sounds like "Sell America." Yet, on Oct. 16, 2008, with the Dow Jones Industrial Average at 9000 and the S&P 500 at 950, Buffett penned a now-famous op-ed submission to The New York Times saying it was time to buy America. Those who bought America that day are feeling ... well, downright un-American. Or at least they're feeling poorer...

Alex Crippen disagrees with Jim Cramer

"Buffett was clear in his Times piece that he was buying U.S. stocks for his personal account. For himself, and for many investors, he saw cheap equities as the best way to put cash to work.

But Berkshire has other opportunities to make money that simply aren't available to everyone else. Most notably it can become a lender of last resort to solid companies going through a difficult time, and it can collect a very hefty interest rate for those loans.

Last fall, Buffett wasn't "buying American" for Berkshire, but he was "loaning American." A total of eight billion dollars went to General Electric and Goldman Sachs. Those loans pay 10 percent a year, guaranteed. The major risk is a collapse of these enormous icons of American business, a risk small enough for Buffett to accept.

And those billions of dollars of loans may very well have come from stock sales. After all, Buffett always wants to have a base level of cash on hand and resists borrowing money to finance investments.

Even if Buffett thought Johnson & Johnson would ultimately generate a solid return, it seems unlikely to expect that return would be 10 percent a year.

Buffett is not just looking for good investments for Berkshire, he's looking for the best investments he can find, that carry as little risk as possible.

Loaning billions to GE and Goldman at 10 percent over a few years could easily be a better use of that money than letting it ride in the stock market. (It does imply that he saw the stocks he sold as less likely to move higher than other equities in the portfolio.)

Indeed Buffett confirms that he sold America to buy America;

we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to
sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips)

This is in keeping with his strategy to sell when a better deal comes along