Considering the extent of the rally in stocks it's difficult to buy anything right now. In the spring, almost all of the stocks on this list were below (in some cases well below) the highest price I'd be willing to pay.
Stocks under the dashed line have become too expensive for me.
Unfortunately, most of the stocks are now below that line.
Kraft (KFT) has been held back by it's bid for Cadbury (CBY).
Coca-Cola (KO) is becoming expensive fast.
I have increased what I'd pay for MHK and HANS.
As always, the stocks in bold have two things in common. They are:
1) currently owned by Berkshire Hathaway (as of 6/30/09) and,
2) selling below the price that Warren Buffett paid in the past few years.
There are several other Berkshire Hathaway holdings on this list but they don't have the 2nd thing going for them.
These are all intended to be long-term investments. A ten year horizon or longer. No trades here.
Stock/Max Price I'd Pay/Recent Price(10-12-09)
JNJ/65.00/62.53 - Buffett paid approx $ 62
KFT/30.00/26.19 - Buffett paid approx $ 33
USB/24.00/23.02 - Buffett paid approx $ 31
COP/50.00/51.36 - Buffett paid approx $ 82
WFC/28.00/30.28 - Buffett paid approx $ 32
BNI/80.00/82.01 - Buffett paid approx $ 75
The max price I'd pay takes into account an acceptable margin of safety**. That margin of safety differs for each company. In other words, I believe these are intrinsically worth quite a bit more than the max price I've indicated in this post and in prior Stocks to Watch posts. I also believe these companies generally have favorable long-term economics (i.e. high and durable ROC) and, as a result, intrinsic values will grow over time. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss. Still, a year from now I would expect to be willing to pay more for many of these based upon each company's intrinsic value growth over that time frame.
Many stocks have rallied so the risk of paying more than necessary in the short-term is there.
Yet, another risk, of course, is missing a stock entirely because it continues to rally. There is no perfect answer to this. The risk of missing something you like when a fair price is available (error of omission) can be more costly than suffering a short-term paper loss.
Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.
"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett's 2008 Annual Letter to Shareholders
In other words, not buying what's still attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.
To me, if an investment is initially bought at a fair price, and is likely to increase substantially in intrinsic value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes real (error of commission).
Bottom line: There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists. Sometimes ignoring the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above positions (at least those that eventually become, or have previously become, cheap enough to buy) unless they sell for significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and misjudge a company's economics in a major way, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.