I have been recently covering the substantial acquisitions by Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) of the oil producer Occidental Petroleum (OXY). Following the latest additions, Warren Buffett (Trades, Portfolio)’s conglomerate owns nearly 20% of the oil producer's shares outstanding, although the real stake is higher if we include preferred stock and warrants.
I want to take a look at the mentality behind the trade, and why I believe it perfectly illustrates Buffett's continued committment to value investing in spite of the criticism levelled at him in 2020, when many though he should have pursued deals even as he didn't see any value-worth deals at the time.
At the Berkshire 2022 annual meeting, one shareholder asked the billionaire investor why he had decided to build such a large position in Occidental and several other businesses during the first quarter of 2022 after being a net seller for much of 2020 and 2021. Buffett explained:
“That’s not investment. You’re not buying from [investors]. I find it just incredible. You couldn’t do that with Berkshire... Overwhelmingly, large companies in America, they became poker chips...
That enabled us, in a two-week period, to buy 14% of a business that’s been around for decades...
Imagine trying to [buy] 14% of the farms in this country, 14% of the apartment houses, 14% of the auto dealerships, or just anything, when already 40% were locked up some other place. It defies anything Charlie [Munger] and I have seen, and we’ve seen a lot.”
Buffett went on to add that he believed short-term thinking and a “gambling mentality” had prevailed in 2020 and 2021, allowing him to acquire such a significant stake in Occidental at a discount once the outlook for the oil and gas sector improved substantially.
This is the traditional Benjamin Graham style of value investing at work. What is really amazing about this way of investing is the fact that Buffett has been able to deploy so much capital so quickly into such a big business thanks to not being tempted to buy overvalued stocks.
Some mistakenly think of value investing as buying small companies at a massive discount to their book value and achieving a small profit if they return to book value. However, here we are looking at a multi-billion-dollar company, one of the largest oil producers in the United States, that the Oracle has been able to acquire nearly 20% of at what he believes are incredibly attractive prices.
The principles are exactly the same. It’s just the size of the deal that is different. If you're Buffett, it is possible to buy a significant stake in a significant business at a price that seems incredibly attractive.
It also illustrates why value investing should not be just confined to smaller businesses, or companies that are struggling to increase output or going through a period of change or uncertainty.
Occidental is growing, its cash flows are robust and it has a bright future with shareholder returns hitting the double digits this year. It is not reporting losses, and investors do not have the opportunity to buy this stock at a discount to book value (it is notoriously difficult to calculate book value for oil and gas companies). Nevertheless, Buffett believes the company looks attractive and is doing the right thing by returning cash to investors in a favorable operating environment.
No matter what you think about Occidental or Buffett, this example clearly illustrates that the value investing mentality, which Graham first described in the early 1900s, still works to this day, and it is something Buffett has used repeatedly throughout his career.
The Oracle has been waiting years to deploy his cash. He is now acting quickly and with conviction to buy a substantial stake in a business that he thinks is incredibly undervalued. That is a strategy anyone can follow. You don’t have to be a billionaire to act quickly and take advantage of value opportunities when they appear; this is when our patience pays off.
