A 30% Discount on One of Buffett’s Favorite Stocks

Large swings in the Dow Jones Industrial Average and other major market averages always seem to increase the level of fear in business news headlines. Here are some good ones we’ve seen in the past few weeks:

“Panic selling returns to fragile markets”

“Investors urged to avoid panic moves as markets plunge”

“Panic grips markets on ‘Bloody Monday’; global contagion keeps markets under pressure”

“Chart shows the peak of US investor panic today”

“European shares tumble as China panics investors”


I don’t think these headlines truly reflect the attitude of most individual investors, though. It’s important to remember that all a headline tells us is what the headline writer is thinking. Personally, I believe recent experience has taught many individual investors to take market pullbacks in stride. We’ve gone through two major bear markets in a little more than 15 years, and both times the markets have recovered.

In the middle of the last major recession, Warren Buffett — one of the world’s greatest investors — wrote an op-ed for The New York Times explaining why he was still buying stocks. It wasn’t because he thought the market had bottomed. In fact, he clearly stated that timing a bottom was not his intent (which was a good thing because he missed the mark by a number of months).

Instead, Buffett was still buying stocks because they do well in the long term, even in the face of daunting headlines. He wrote:

“Fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

U.S. stocks have recovered from every major bear market for more than 200 years. When the market turns sour, many of the most successful investors don’t make any major changes to their strategy. Buffett, of course, is an example of one of those steadfast investors.

We can see this every year in Buffett’s annual letter to Berkshire Hathaway (NYSE: BRK-B) shareholders, which always begins with a table showing the company’s performance since 1965. On the same page is the performance of the S&P 500.

Most years, Berkshire has beaten the index. But there are some years where the returns weren’t always so sweet.

I imagine 1974 was an especially trying year for Buffett. As the country dealt with increased oil prices, high unemployment and rising inflation, Buffett watched the share price of Berkshire Hathaway drop 48.7%, nearly double the S&P 500’s 26.4% fall. This followed a 2.5% drop from the year before. As a major investor in Berkshire Hathaway, Buffett lost what must have been a significant portion of his personal wealth in just two years.

By 1976, though, the share price had fully recovered. From that point on, there would be occasional periods of underperformance, but Buffett continued to follow his disciplined approach to making investments, which has led to one of the largest personal fortunes in the world.

His constant focus on value and discipline sets a great example for other investors. 

Additionally, like all large investors, Buffett is required to publicly disclose his positions after he buys a stock. 

On Aug. 28, Berkshire Hathaway announced it had added more than 50 million shares of oil and gas refiner Phillips 66 (NYSE: PSX) — nearly 10% of the company’s outstanding shares — making it Berkshire’s sixth largest holding.

Despite Buffett’s recent vote of confidence in the company, PSX is trading at a discount relative to its sector. Based on this year’s estimated earnings per share (EPS) of $6.64, shares have a price-to-earnings (P/E) ratio of about 12, while the sector average for basic materials stocks is about 16. This discount could be what attracted Buffett to the stock.

He may also have been impressed with management’s financial performance. The company’s return on equity (ROE), a measure of management effectiveness, is 19.3% compared with 6.6% for the average basic materials stock.

The SEC filings don’t tell us exactly how much Berkshire paid for PSX. But the stock traded in a range between roughly $77 and $82 in the second quarter, which is when Berkshire would have been buying those 50 million shares. 

Furthermore, this week, Berkshire Hathaway announced it added an additional 3.5 million shares. CNCB reported roughly two-thirds of the shares were purchased on days when PSX hit a low around $77.

So it’s relatively safe to assume Buffett sees value in PSX at $77. That’s all well and good, but if you had the chance to get a better price than Buffett, you’d take it… right?

You bet you would. That’s why I recently told my Income Trader subscribers how they could purchase shares at a 30% discount to what Buffett likely paid. We did this by exploiting an often misunderstood part of the market that Buffett himself uses.

In fact, it is a strategy that has paid Buffett millions of dollars simply for agreeing to buy shares of a company he wants to own anyway — if they fall to the price he wants to pay. Of course, we do this on a smaller scale each week in Income Trader

For example, my readers were paid a minimum of $75 for the chance to buy PSX at discount of more than 30% to where it was trading at the time. And they could have easily scaled up to make $150, $375, $750 or more… and that’s just one week’s take home.

Income Trader subscriber Brad C. from Memphis, Tenn., said he made over $1 million following my recommendations last year.

If you have just eight minutes, I urge you to watch this presentation detailing exactly how it’s done. It’s the simplest explanation around of a strategy that has made Buffett and even some average investors millions. Click here to access it.