Buffett bets Big on Oil !
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble” — Warren Buffett.
Berkshire Hathaway started accumulating shares in oil refiner Phillips 66 back in the spring of 2015. Shortly after Goldman Sachs reduced the rating from Neutral to Sell in November, Berkshire resumed purchases, which continued into January of this year. Their stake at the end of January is reportedly close to 13.7%, equivalent of $5.79 billion.
Now decades ago I was naïve enough to believe every random game produces a random winner, and perhaps Mr. Buffett may have been fortunate enough to amass great wealth on the basis of investing in companies that produce products that he personally loved — think Coca Cola, Dairy Queen. Clearly there is more to it than this. Yes there have been some bad years, typically associated with global economic downturns (1998, 2008, and even 2015), but the gravity defying performance of Berkshire Hathaway Inc. over two decades attests to the fact that luck plays no part in their investment thesis.
“Be Greedy when others are Fearful”
Although this is a quote from the Oracle of Omaha, it is clearly obvious that personal greed plays no part in what motivates the 86 year old to play ball everyday. You will not see a Maybach or a Rolls Royce parked in a cavernous garage in a Dr. No style mansion on a cliff top. Instead you’ll find a modest Cadillac XTS that had recently replaced an 8-year-old DTS, and a surprisingly demure 5-bedroom house in Happy Hollow that he has owned for close to 5 decades.
A survivor of prostate cancer, Warren Buffett is still very much in the game, and this most recent “oil bet” is apparently backed by the man himself, and not one of his portfolio managers.
So what can we take from this huge gamble? Well firstly that according to Buffett’s investment methodology, this is no doubt a calculated decision that was derived from a meticulous bottom up analysis of the company at stake. Yes this looks like your typical value play, selecting what they have deduced as best value in class, mirrored with a firm belief in the management. It would also appear that Buffett has embarked upon averaging down, and even doubling down as the Phillips 66 investment stake grows whilst the stock price has plummeted from a $94.12 high in November 2015, to just under $80.00. This also has to be, by its very nature, an oil play, but he has been very wrong about oil before. Perhaps Buffett had learnt a lesson from his surprising decision to invest in Conoco Phillips back in 2007. Call it uncharacteristic, but Buffett continued to add to his Conoco position well into 2008 when oil prices were hitting peaks. We might argue that with cash needed to be put to work, this perhaps was a rare event where Buffett was caught in a gold rush of a bull market and inadvertently decided to invest in a best in class vertically integrated and well managed company. It was a rare event where the macro story got the better of him, and it resulted in billions lost.
What I like about this latest investment in Phillips 66 is that it comes at a time when the financial world is spewing out downgrades for the oil sector left right and center. Crude Oil WTI has absolutely collapsed since its 2009 high of around $140.00 — currently hovering around the $30.00 mark. Some of his greatest investments were initiated during a bloodbath and there is no doubt the current oil rout qualifies. Whatever the reasons — China slowdown/Iranian deal, commodity price action is cyclical, and given Berkshire’s usual long-term investment horizon, this investment has more parallels with their incredibly timely 2008 investment in Goldman Sachs.
I am the Co-Founder of Quimojo, a revolutionary new concept in Global Campus Recruitment. With over two decades in Financial Markets, I still like to keep track of this crazy world I was once part of. But now viewing things from outside, I may have a different perspective.
