Beating Buffett At His Own Game… Again
I’m a Warren Buffett fan. After all, what’s not to love?
From 1965 to 2009, the “Oracle of Omaha” increased the book value of his Berkshire Hathaway (NYSE: BRK-A) portfolio by an average of 20.3% annually. He posted a loss in only two of those 44 years. Now that’s a track record.
Even though shares of ConocoPhillips rebounded from that pitiful low, Buffett ended up realizing rare and sizable losses on his position.
ConocoPhillips was a profitable holding for me, however. I became a shareholder when ConocoPhillips bought out Burlington Resources on March 31, 2006. By then, I already had triple-digit gains on my position. But the trend in energy prices still appeared to be strong, so I kept the shares. Unlike Buffett, however, I sold off most of my COP position before 2008 — for additional realized gains of roughly 25%.
While 25% isn’t a huge profit, ConocoPhillips is still an investment that I will remember for a long time. I didn’t get caught up in the “oil is going to $250 per barrel” hype. I’m glad I didn’t get too greedy.
And of course, it was a rare instance when I could say I bested Buffett.
But I’m attempting to do it again. Although, this time, Buffett set the bar a little higher. In fact, he’s been profiting nicely on this position. Since buying this foreign company (U.S. traded) in 2006, he’s returned an annual average of 7.8% — beating the S&P by a total of 38.6 percentage points.
It’s not that I think I’m smarter than Buffett. I just think the conditions are far better for this investment now. That’s because this stock is a steel company, steel prices are rising, and I believe 2011 demand is going to be higher than expected.
Like most commodities, the price of steel plummeted during the financial crisis but started to rebound in March 2009. Steel prices had a little setback starting in May 2010, when economists pondered the potential for a double-dip recession. But economic indicators and strong corporate profits have started to alleviate those fears, and steel has started to inch up again.
Within the past few weeks, AK Steel (NYSE: AKS) announced another $30 price increase per ton on its hot and cold rolled steel. Generally, when one company boosts prices, the rest of the industry follows suit. Hyundai Steel now has followed suit.
In addition, steel demand is expected to have grown 13.1% in 2010 over what it was in 2009. In 2011, demand is estimated to grow at a much slower pace, but I think analysts are being too conservative. People in the industry cite an expected slowdown in China next year. But even if that’s true, that neglects the rebounding demand in the rest of the world.
U.S. auto sales are expected to grow near double-digits this year. And even a “slower” Chinese car market is pegged for 10-15% growth in 2011. Steel demand in Southeast Asia is expected to grow by 7.4%. And in India the estimate is for a 13.5% growth in steel demand.
Action to take –> We can debate the 2011 numbers, but bottom line: Prices will continue to rise along with demand, which I think should be strong this year. So while demand for the commodity hasn’t reached its peak I believe this is definitely a good time for investing in steel stocks.
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