Ready for a Buffett bounce?

The buyers are coming in the form of index funds making Berkshire ripe for a trading opportunity.

By Jamie Dlugosch Feb 10, 2010 4:54PM

Warren Buffett’s decision to split the B-class shares of his company, Berkshire Hathaway (BRK.B) last month is still generating lots of speculation. Most immediately: Will the shares see a boost on Friday, the last day before shares are added to the S&P 500 index?

 

Well here’s a secret about Warren Buffett that might help answer that question: He cares about making money, and that’s it!

 

And the strategy -- making shares available to smaller investors by reducing the price from around $3,500 to around $64 -- has generated positive public relations and made him a lot of money already.

 

With the market pushing up the share price in anticipation of BRK.B joining the S&P 500 index, the stock is in the $70s and up 12% this year.

 

But amid all the hype, shares no longer look underpriced -- so I'd be careful here. You may see a one-day bounce, but a long-term decline. (10 stocks on the rise)

 

Have no illusions about these moves. It's not about altruism. The most well-known investor of his generation is in this business to make a buck, plain and simple.

 

Buffett's made a lot of money on BRK.B this year. And that's OK; so have his shareholders, so he's doing his job.

 

An addition to the S&P 500 does usually move a stock up, due to index fund buying and moves made by traders who know how that game is played.

 

But the upside from here looks limited, so I say be careful. Traders geared up for very short term moves may win, but the little guy can get burned here.

 

Longer term, while it is true that Buffett can do wonders with respect to picking up great companies, his track record of late is in question. Aside from making a mint by providing capital to firms like Goldman Sachs during the financial crisis, his stock picks are only doing so-so.

 

In my opinion, the Buffett operation is looking more and more like its own brand of Wall Street. The only difference is this Wall Street is located in Omaha, Nebraska.

 

Buffett and Berkshire make money by attracting capital and then deploying such capital in profitable ways. No problem there, as everyone wins.

 

But buying the stock at current prices is today's question. Yes, the little guy can more easily afford to buy Berkshire after the split. But he'd be doing to today at an inflated price.

 

As all too often happens in the market, by the time a good deal gets to the little guy it is probably too late. It's tempting to play the Berkshire addition to the S&P 500 which you still can, but I would steer clear. (10 stocks not to steer clear of)

 

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