4 Ways to Follow Buffett’s Big Bets
Here is an ugly truth about deal making. When you are looking for a deal, don’t just look at the pretty partners. You should be looking at the ugly too to see if there is an opportunity.
For years the U.S. housing market has been pretty ugly. While the 2008 housing bubble was unexpected, Warren Buffett stated in early 2012 that you can still expect couples to want to form families. “That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”
A theme we highlight in our book, “How to Close a Deal Like Warren Buffett” (www.closelikebuffett.com), is that the man is opportunistic. He won’t make deals just to make deals, but when he is out to make a deal he knows exactly what he wants. He also tends to make deals in clusters: housing and construction, insurance companies, furniture retailers, candies and confections, shoes and footwear, jewelry, and so on. He wants businesses that he understands and whose products he expects people to want in the future.
In the 2012 letter to shareholders Buffett said: “We have five businesses whose results are significantly influenced by housing activity. The connection is direct at Clayton Homes, which is the largest producer of homes in the country, accounting for about 7 percent of those constructed during 2011. Additionally, Acme Brick, Shaw (carpet), Johns Manville (insulation) and MiTek (building products, primarily connector plates used in roofing) are all materially affected by construction activity.”
Instead of getting out of housing, Buffett waited for the opportunity to up his bet when the timing was right.
How to Be Opportunistic Like Buffett
Don’t be afraid of opportunities that make sense. “I don’t try to jump over seven-foot bars: I look around for one-foot bars that I can step over,” says Buffett. Here are some maxims to guide you.
1. Buffett is adamant that you don’t force deals. “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of opportunities come along, and I’ve had long dry spells. If I get an idea next week I will do something. If not, I won’t do a damn thing.”
2. In addition, every deal must pencil out in advance. “You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if you can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it.”
3. Don’t overcomplicate negotiations. “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is most effective.”
4. Opportunistic deal making shouldn’t be difficult. “There seems to be some perverse human characteristic that likes to make easy things difficult.”
Of course, he likes opportunities with consistent earnings history and a good return on equity with little debt. Perhaps most important of all, he likes honest and hardworking managers. When the economics are right and the company has trustworthy people in charge, you can expect that he will make a deal. These are not secrets we have uncovered. He talks about these in his annual reports, his media interviews, and his public speaking.