Warren Buffett (Trades, Portfolio) has repeatedly said he is a long-term investor, so whenever he buys a security, he buys intending to hold it "forever."
For the most part, this is true. In the last few decades of his career, Buffett has focused on buying and holding high-quality stocks for the long run, although at the same time, he has traded in and out of securities on a reasonably regular basis.
For some investors, this could indicate that Buffett is not as much of a long-term investor as he seems to suggest, and there's certainly evidence to prove that point.
However, I think investors should ignore the short-term noise around the smaller holdings in Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) portfolio. It's the large holdings that really matter. When it comes to these more prominent positions, Buffett likes to buy and hold.
But that doesn't mean investors should overlook the smaller holdings and other positions the conglomerate has traded in and out of over the years. Indeed, we can learn a lot from looking at some of the more unusual trades Buffett has placed over the past five decades.
Value investing in a crash
In the late 1990s and early 2000s, Buffett, like most other value investors at the time, faced a problem.
The internet bubble swelled the valuations of growth stocks to egregious levels in the late 1990s. This made it difficult to find undervalued securities to buy.
When the bubble popped in the early 2000s, growth stock valuations declined, but picking winners and losers was challenging in an environment with so much uncertainty.
Buffett decided to take advantage of this environment by acquiring corporate bonds. He explained the situation in his 2001 letter to shareholders:
"During 2001, we were somewhat more active than usual in 'junk' bonds. These are not, we should emphasize, suitable investments for the general public, because too often these securities live up to their name."
The letter went on to explain one situation the conglomerate had become involved with:
"In late 2000, we began purchasing the obligations of Finova Group, a troubled finance company, and that, too, led to our making a major transaction. Finova then had about $11 billion of debt outstanding, of which we purchased 13% at about two-thirds of face value. We expected the company to go into bankruptcy, but believed that liquidation of its assets would produce a payoff for creditors that would be well above our cost. As default loomed in early 2001, we joined forces with Leucadia National (Trades, Portfolio) Corp. to present the company with a prepackaged plan for bankruptcy."
According to another letter, which was published in 2003, Buffett spent $8 billion buying corporate bonds, which generated a substantial profit for the group over the next several years.
Buffett and other value investors receive a lot of attention for their stock trades, but credit and debt trades are often overlooked. This is an error because these types of investments are still far more inefficient and are easier to value than equity investments. What's more, they usually also offer a fixed payment and redemption date.
Seth Klarman (Trades, Portfolio)'s hedge fund, the Boston-based Baupost, has invested heavily in debts and credits over the years for these reasons.
Redemption dates or liquidation events present a value catalyst, which provides a set payout at a specific date, meaning that unlike equity investments, which can remain depressed in value for years, there's always going to be a catalyst to unlock value. This could make these instruments far better value investments than anything else. These trades don't attract nearly as much attention as Buffett's equity trades, but I think they're far more informative.
