Lament The Short Term

August 8, 2007 by Joe Ponzio

Berkshire Hathaway bought another 1.62 million shares of Burlington Northern Santa Fe (BNI) in the past few days, according to a recent filing with the Securities and Exchange Commission. If you recall, Buffett’s company disclosed in April that it had bought 39.03 million shares of BNI, sending the stock some 10% higher.

Months later, BNI regressed back to its low-80s price, right around where Buffett was buying. As you can imagine, he bought more.

There are few things more exciting than buying a stock and watching it run up quickly over the next few days. Then again, there are few things more gut wrenching than watching your stocks drop. That is, of course, unless you are a business owner investor.

What was Buffett thinking back in April-when he had moved some $3 billion into BNI and the stock jumped 10%? I can’t say for sure, but it was probably something like this:

Damn, I could only buy $3 billion worth. Now it’s too expensive.

Wall Street did its thing-it pushed BNI higher for a few weeks, profit takes jumped out of their stock (ignoring the business), and the price dropped back to Warren’s acceptable level. Time to buy a business again.

When the prices of your businesses run up in the short-term, lament it. It usually takes anywhere from 18 months to 3 years for a low-priced business to climb back to or above its value. In the meantime, you should hope that the price drops as low as possible so that you can load up. The lower the price, the more money you’ll make.

What’s the difference between buying BNI at $80 versus $88? If Buffett thinks the business (and hence, the stock price) will be worth $200 in five years (just guessing here), the difference is 2.3% in his average annual return-or roughly $681 million on a $3 billion investment.

Which would you prefer-a quick 10% gain or $681 million? I think we know what Bufett would choose.

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