Warren Buffett usually has a pretty good reason to perform a large stock transaction, especially when his holdings company, Berkshire Hathaway, is well known as a major stake owner. On December 9th, Wall Street Journal reported that Berkshire Hathaway sold 2.7 million shares of Moody Corporation. Every time Buffett's company makes a move, I like to predict what caused the large selloff. Perhaps we can learn a lesson or two about successful independent investing without risking our own money. Well, I did some digging and here is what I came up with.
1. Buffett Likes Cash Rich Companies…Moody's Debt to Assets Ratio is Climbing Higher
One thing Buffett like is cash. Companies with plenty of cash can survive the worst financial climates because they never have to borrow and/or use financing at unfavorable rates to pay their bills. Take a look at the rising Debt to Assets ratio courtesy of Google Finance:
Moody used to hold over $500 million in cash in 2006…$580.50 million to be exact. In the last quarter, MCO held $429 million in cash. So what caused to ratio to spike? It turns out that long term debt went to $300 million in FY '06 to $748 million in Q3 '09. Moody's target customer is the Business to Business market, and with more investment companies going out of business, their target market seems to be shrinking.
2. Moody Cuts Berkshire's Perfect Triple A Rating
It's not all about financials in the world of business. Sometimes politics erupt and tensions flare. Last spring, Moody's cut Berkshire's pristine triple-A credit rating a few months before Buffett's company started reporting the sales of Moody's stock. Why on Earth did Moody's think Buffett would ignore such an action? Berkshire uses it impressive credit rating to borrow money at the best rates while other companies struggle to find financing.
Berkshire created money out of thin air by borrowing tons of money at cheap rates then turning around to loaning it out to companies who were extremely desperate for short term financing. In fact, Buffett loaned money to General Electric, Goldman Sachs, and Tiffany Co. to name a few. If you step on Buffett's cash cow, then he will sell your ass down the river.
3. Bet Big on Transportation and Hedge Bets on Credit
Perhaps credit related businesses are taking a back seat to more attractive long term investments like transportation. The world population grows steadily while credit based business are facing big slow downs in volume and in profit margins. American Express, my preferred credit card company, even cut the limits on loyal customers while terminating accounts on others.
If you've ever driven on U.S roads, then you realize how crowded it can get. I watch truckers sit in standstill traffic along with average Americans, and wonder how XYZ trucking company makes any money sitting in gridlock traffic? Companies like Burlington North (BNI) and Union Pacific (UNI) offer a long lasting production: affordable, cheap transportation.
I would allocate more money to the better long term investment, and we all know that's Warren's mantra: Buy something that you would own even if the stock market closed down for 5 years straight. For more information on successful investing tips, get instant access to Elliott Wave's Independent Investor Ebook.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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