Sunday, July 13, 2008

Warren Buffett gets busy

For the second time in the past few months, the Oracle of Omaha's Berkshire Hathaway is helping to finance a big deal. That's an encouraging sign.

By Paul R. La Monica, editor at large
Last Updated: July 10, 2008: 10:24 AM EDT

NEW YORK ( -- American consumers aren't the only ones going shopping. So is Warren Buffett.

Stocks initially rose Thursday morning thanks to better-than-expected sales reports from Wal-Mart (WMT, Fortune 500) and other top retail chains.

But the other big corporate event of the day was the news that Dow Chemical (DOW, Fortune 500) agreed to buy rival specialty chemical maker Rohm & Haas (ROH, Fortune 500) for $78 a share, a whopping 74% premium to yesterday's closing price.

Dow is getting some help to finance the deal, including money from a Kuwaiti sovereign wealth fund and none other than Berkshire Hathaway (BRKA, Fortune 500), the investment arm of Buffett.

This is interesting since it marks the second time in the past few months that Berkshire has taken part in a high-profile deal.

In April, Berkshire agreed to help privately held Mars finance its $23 billion takeover of The Wm. Wrigley Jr. Company, the gum and candy maker. Berkshire also said it was taking a $2.1 billion stake in Wrigley (WWY, Fortune 500).

It all just goes to show that Buffett is not panicking in this rocky market and is instead searching for opportunities.

To be sure, Buffett is not ignoring the obvious bad news about the economy. He's said in numerous interviews this year that he believes the economy is already in a recession and that it could be worse than some fear.

But Buffett is putting things in perspective. Recession does not equal the second Great Depression or economic Armageddon. Rather, Buffett seems to be following the tried and true investing axiom that the best time to make long-term bets is when fear is at its peak.
And make no mistake, this is a market ruled by fear right now. Investors are scared that oil prices are going to head even higher due to the uncertainties in Iran. They are afraid that mortgage financing giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) may need a government bailout.

Keep in mind, Buffett isn't making trading calls here. So his recent activity doesn't necessarily mean that the markets can't still head lower in the next few months.

What Buffett is doing though, is signaling that this is not a time for investors to be overly cautious. Stocks are still a good bet for the long haul.

For example, he told Fortune's Carol Loomis earlier this year that he has a bet with New York investment firm Protege Partners about where the market is going to head in the next 10 years. Buffett is betting that the S&P 500 will post a bigger return than a group of top hedge funds over the next decade.

In addition, Berkshire has also made some very contrarian bets in financial services this year that only can be justified by a belief that the market turmoil has created some deep values in that beaten-down sector.

In the first quarter of this year, Berkshire increased its stake in regional banks Wells Fargo (WFC, Fortune 500), U.S. Bancorp (USB, Fortune 500) and M&T Bank (MTB). Berkshire also boosted its exposure to some consumer stocks in the quarter, most notably food giant Kraft (KFT, Fortune 500) and used car retailer CarMax (KMX, Fortune 500).

At the end of the day, investors should be reassured that the Oracle of Omaha is staying busy. Yes, it certainly seems like a frightening time right now to invest. But if Buffett's not hiding under the bed, why should you?

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