Baskets And Buffett

At this point, Buffett he has said whatever it is anyone wants him to have said given the amount of source material to choose from and the apparent willingness to take it out of context. Case in point: baskets.

I have a basket of discount plays - BDC’s, Closed end funds, and the like. This is a basket trade, which can seem to run contra to the very Buffet like notion of putting all your eggs into the one metaphorical wicker basket that is watched very closely. I have been reminded of this numerous times lately. However at the student Q&A last year, Buffet said if he was starting again today - he would be buying baskets of cheap Korean stocks without knowing all - or even most- of the details of the businesses.

And looking back at his very event-driven roots; here is is Buffet doing something similar way back in one of his old Buffet Partnership Letters (1962):

Our avenues of investment break down into three categories.
The first section consists of generally undervalued securities (hereinafter called “generals”) where we have nothing to say about corporate policies and no timetable as to when the undervaluation may correct itself. Over the years, this has been our largest category of investment, and more money has been made here than in either of the other categories. We usually have fairly large positions (5% to 10% of our total assets) in each of five or six generals, with smaller positions in another ten or fifteen.

Our second category consists of “work-outs.” These are securities whose financial results depend on corporate action rather than supply and demand factors created by buyers and sellers of securities. In other words, they are securities with a timetable where we can predict, within reasonable error limits, when we will get how much and what might upset the applecart. Corporate events such as mergers, liquidations, reorganizations, spin-offs, etc., lead to work-outs. An important source in recent years has been sell-outs by oil producers to major integrated oil companies. At any given time, we may be in ten to fifteen of these; some just beginning and others in the late stage of their development. I believe in using borrowed money to offset a portion of our work-out portfolio since there is a high degree of safety in this category in terms of both eventual results and intermediate market behavior. Results, excluding the benefits derived from the use of borrowed money, usually fall in the 10% to 20% range. My self-imposed limit regarding borrowing is 25% of partnership net worth. Oftentimes we owe no money and when we do borrow, it is only as an offset against work-outs.

The final category is “control” situations where we either control the company or take a very large position and attempt to influence policies of the company. Such operations should definitely be measured on the basis of several years. In a given year, they may produce nothing as it is usually to our advantage to have the stock be stagnant market-wise for along period while we are acquiring it. These situations; too, have relatively little in common with the behavior of the Dow.Sometimes, of course, we buy into a general with the thought in mind that it might develop into a control situation. If the price remains low enough for a long period, this might very well happen. If it moves up before we have a substantial percentage of the company’s stock, we sell at higher levels and complete a successful general operation. We are presently acquiring stock in what may turn out to be control situations several years hence.

For those who have not seen it by the way; an unparalleled collection of Buffet source materials has recently been made available at Buffett.cnbc.com; really incredible to have access to some of that stuff so conveniently. Previously a lot of those notes were passed around hand to hand like samizdat.