QUALIPORT
Trade Like Warren Buffett

By Maynard Paton (TMFMayn)
April 18, 2005

"My favourite holding period is forever." -- Warren Buffett

Contrary to popular wisdom, Warren Buffett does not always invest in great companies for the long term. Written by James Altucher, the book Trade Like Warren Buffett lifts the lid on some of the legendary investor's more low-profile, short-term trades.

As all Buffett connoisseurs will know, the great man made his early fortune sifting for arbitrage opportunities and deep-value 'cigar butts'. Yet, despite discovering the stock-market power of 'consumer franchises' -- such as Coca-Cola (NYSE: KO.), Gillette (NYSE: G) and Washington Post (NYSE: WPO) -- way back in the Seventies and Eighties, Buffett remains an active fan of his earlier strategies.

The following twelve stocks and associated comments are extracted from Altucher's book:

1. Automatic Data Processing (NYSE: ADP)

"ADP is the world's largest provider of outsourced payroll processing services. Despite ten years of steady revenue and earnings increases, the stock dipped in 2002-2003… [Buffett] played it for the small dip and subsequent rise, and then got rid of the shares in the first half of 2004."

2. Bell Industries

"On December 13 1999, Buffett filed with the SEC that he owned 5.93 per cent of the shares… Buffett sold his shares within two months when the stock spiked upwards, probably because [of the news] he had bought them -- not a bad investment technique, if you can manage it."

3. Burnham Pacific Properties

"Throughout 1999 and 2000, Burnham Pacific, an owner of shopping malls, was consistently selling off its stores at a premium to the value of those stores recorded in the books… At the end of 2000, shareholders approved a complete liquidation plan. Buffett bought over 5 per cent of the liquidating company in December 2001 and enjoyed the benefits of its final six months of liquidating properties for more than they were initially valued at."

4. Dover Corporation (NYSE: DOV)

"[Dover] makes everything from gasoline-pump nozzles to automated print circuit boards to tractor trailers. It showed consistent revenue and earnings increases throughout the 1990s… Buffett bought shares in the first quarter of 2001 and kept adding to his position until early 2003… As of the end of 2003, when Buffett started selling his shares…"

5. Gap (NYSE: GAP)

"Buffett began accumulating in 2000, continued his accumulation all through 2001 when the Gap was going through the worst of its troubles, and finally began selling in late 2003 when the shares began to rebound."

6. HRPT Properties Trust (NYSE: HRP)

"In December 2001, Buffett filed with the SEC that he had bought 5.1 per cent of HRPT for his personal portfolio. Within two months… [he] promptly reduced his stake to 1.77 per cent."

7. Iron Mountain (NYSE: IRM)

"Buffett began buying up shares of Iron Mountain, [America's] largest document-storage company, in late 2001, accumulating the bulk of his holdings in Q3 of 2002… Buffett began reducing his shares in 2003…"

8. JDN Realty

"JDN Realty was a real estate investment trust that owned 15m square feet of shopping centres… When the company began trading below its book value, in stepped Buffett. His first filing was April 2000…"

9. Level Three Communications (NYSE: LVLT)

"The news of Buffett's [July 2002] investment was surprising, enough to send the shares up to $4.26 per share after the deal was announced, putting Buffett's shares already 50 per cent in the money. By the time Buffett had liquidated 95 per cent of his investment in November 2003, he had made 95 per cent on his money."

10. Laser Mortgage

"Laser Mortgage was a mortgage-backed real estate investment trust that quickly got into trouble in 1999 and 2000… Buffett began acquiring the stock in early 2000 when the stock was trading around $4 and book value was $4.51…"

11. MGI Properties

"Buffett first bought shares of MGI Properties in October 1998 when he filed with the SEC disclosing a 5 per cent stake. Later, this stake was raised to 8.3 per cent and then to 13.5 per cent. In June 1998, the company disclosed that it was liquidating all of its assets and distributing the proceeds to shareholders. The liquidation value was estimated at $33 and the stock at the time was trading around $20."

12. Tanger Factory Outlet Centers (NYSE: SKT)

"Tanger develops factory outlet centres… By March of 1999, the company was trading at a 27 per cent discount to its net asset value. Additionally, the company was yielding 12 per cent and steadily increasing the dividend… In April of 1999, Buffett bought 5 per cent of the company, eventually increasing his stake to more than 13 per cent by 2000 and then reducing his stake to below 5 per cent by mid-2001."

Summary

I've known for some time that Warren Buffett isn't Warren Buffett. Published in 2000, this article suggests that the average holding period of his larger common-stock stakes is below five years. Sure, there are numerous caveats with those statistics, but Trade Like Warren Buffett emphasises the same message: Buffett isn't the 100% devotee of 'consumer franchises' which many commentators make him out to be.

Despite what's mostly said and written about Buffett, it's important to understand:

1. The company that can be bought and held for the long term is the investment exception, not the rule.
2. Great long-term businesses are rarely attractively valued.

I guess when you can't find great businesses selling at bargain prices -- which will be most of the time -- then consider short-term value plays. Buffett certainly does.

(If you want to learn more about Buffett's trading strategies, you can order a copy of Trade Like Warren Buffett here. Other good books on Buffett are listed here.)

Portfolio value

Holding	Number of shares	Closing price 18/04/05 (p)	Value (£)
Associated British Ports	681	468.5	3,190.49
Emap	372	823.5	3,063.42
Halma	1,920	149.25	2,865.60
Johnston Press	1,608	516.5	8,305.32
London Stock Exchange	2,018	450.25	9,086.05
Cash			207.07
Total			26,717.94