Now's the Time to Buy Stocks | Warren Buffett Just Bet $20 Billion on These Stocks

It's been a whopping six years since Buffett has made an investment like what just got announced. One of the biggest criticisms in recent years about legendary investor Warren Buffett is that he's been sitting on the sidelines and not investing while stocks have soared. There have even been people talking about Buffett being washed up. Buffett even admitted to himself in his most recent annual letter just last month that he "failed investors" by not finding any attractive investments in 2021. Buffett's pile of cash at his company Berkshire Hathaway reached a staggering nearly 150 billion dollars because the greatest investor of all time simply couldn't find anything worth buying.

But boy, do things change quickly. In a matter of weeks, Buffett put nearly 20 billion dollars to work into two separate investments. In this video, we are going to discuss these two huge investments and see how they compare to Buffett's famous investing checklist. Make sure to stick around to the end of the video because Buffett's investing checklist is something that you can start applying to your own investing today. But first, make sure to give this video a like because a ton of work goes into these videos, and it helps out the channel a ton.

Now let's jump into the video. The first of Buffett's investments I want to talk about is this offered by Allegheny, ticker symbol Y. Yeah, that's really their ticker symbol—just the letter Y. Allegheny is the quintessential Buffett investment. The company has kept a very low profile over the years as it doesn't even host quarterly earnings calls and has very little Wall Street analyst coverage. Allegheny is in the insurance business. The company operates primarily in the property and casualty insurance industry. Property and casualty insurers, or P&C for short, are companies that provide insurance coverage on assets such as houses, cars, and other things, as well as provide liability insurance for accidents, injuries, and damage to other people or their belongings.

Allegheny's largest business segment, accounting for over 50 percent of its revenue, is what is referred to as reinsurance. Without getting into too much detail, reinsurance is essentially insurance policies that one insurance company can purchase from another insurance company. Put even more simply, reinsurance is insurance for insurance companies. In addition to insurance, Allegheny also owns some non-insurance companies, including a steel fabricator, a trailer manufacturer, and even a hotel management company. One way to think about Allegheny is kind of like a mini Berkshire Hathaway. Just like Berkshire, it has its core insurance operations, but it also owns a collection of different businesses and other investments.

Allegheny's insurance operation would fit in with Berkshire's larger portfolio of insurance operations, which includes Geico for car insurance and General Re, a unit that insures against major catastrophes and unusual risks. Buffett offered 11.6 billion dollars to purchase Allegheny, which would make this the first sizable acquisition for this company in six years. In fact, this deal would be in the top five largest acquisitions in Berkshire's history.

And really quick, just a funny aside that is going to go down as a typical Warren Buffett move: the price that Berkshire is offering to buy the company works out to eight hundred and forty-eight dollars and two cents a share. This number is odd as most deal prices don't get into fractions of a dollar. However, the reasoning behind the unique per share deal price is classic Buffett's.

His original offer was eight hundred and fifty dollars per share; however, he reduced it nearly two dollars per share to account for the 27 million dollars in investment banking fees. Allegheny paid Goldman Sachs investment bankers to give advice on deals, and they get paid a ton of money for that advice, which isn't always the best. Buffett does not like investment bankers and views them as "high-priced parasites," so he refused to cover the additional cost, and instead, it came out of the deal price. Classic Warren Buffett! And at even 91 years old, some things never change.

Now on to the second big investment Buffett made recently. The second big investment Buffett made recently was in a company called Occidental Petroleum, ticker symbol OXY. Occidental Petroleum is an energy company. The company is in the business of oil and gas exploration and production. It operates through three segments: the oil and gas segment explores, develops, and produces oil and natural gas; the chemical segment manufactures and markets basic chemicals; and the midstream and marketing segment purchases, markets, processes, transports, and stores oil, natural gas, and power.

Occidental Petroleum's stock price has really struggled in recent years. In May of 2018, the stock price was trading north of 85 dollars per share. Then, the stock fell until it hit a low of around 10 per share in October 2020. However, since the start of this year, the stock has performed very well and is actually the best-performing stock in the S&P 500 so far this year. Between the shares Buffett has acquired and the warrant Buffett owns, he could have a stake that equals nearly 24% in the company. For those of you who don't know, a warrant gives an investor the right but not the obligation to purchase a stock at a certain price.

So for example, as part of Buffett's 10 billion dollar investment in the company back in 2019, he received warrants that gave him the option to purchase nearly 84 million shares in the company at 59.92 per share. So let's say the stock is trading at 100 per share. When Buffett goes to exercise these warrants, that means that despite the stock's current price of one hundred dollars per share, Buffett can purchase the stock at just 59.92. You can see why this would be extremely valuable and advantageous for Buffett to do.

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Okay, now back to the video. One of the most important lessons we as investors can learn from Warren Buffett is the concept of circle of competence. This concept is honestly super simple but incredibly powerful. Imagine a circle. This circle represents businesses that you understand and can determine a value for based upon your knowledge and experience. Any company that falls within the circle is a company you can invest in at the right price. Anything that falls outside of your circle of competence is a business that you don't understand well enough to invest in. This is how you limit mistakes when investing. You only invest in companies and stocks that fall within your circle of competence.

According to Buffett, there are only two rules when it comes to investing: Rule number one: never lose money. Rule number two: never forget rule number one. Buffett has frequently said that his biggest investment mistakes have been when he has gotten too close to the edge of his circle of competence. Now, let's see how this concept applies to Buffett's investments in Allegheny and Occidental Petroleum. Allegheny operates in the insurance industry. In the press release announcing the deal, Buffett has said that he has been following and studying Allegheny for 60 years. Talk about in-depth and thorough investment research!

Honestly, based on Buffett's experience with insurance companies, there probably isn't a single investor on the planet that understands insurance businesses better than Warren Buffett. He was investing in insurance businesses even before he ran Berkshire Hathaway. Buffett first bought shares of the auto insurance company that he now owns entirely, Geico, all the way back in 1951 when he was just a 20-year-old college student. He bought his first entire insurance company, National Indemnity, in 1970. Through Berkshire Hathaway, Buffett has owned insurance companies for over 50 years, and today, Berkshire Hathaway is one of the largest insurance companies in the world.

I think it's fair to say that Allegheny is firmly right smack in the middle of Buffett's circle of competence. But please don't get discouraged if you don't have 50 years of experience in an industry. You don't necessarily need decades of experience in an industry for it to be within your circle of competence. What you do need is a deep understanding and knowledge in that particular area for it to be within your circle of competence.

For example, I own several rental properties in one large city in the Midwest of the United States. I have a deep knowledge of that city; I know areas that are popular, what rents are for different kinds of properties, and a general idea of what a property should sell for in that city. So if someone presented a property for me to buy, I would have a rough idea of what it is worth and if I was getting a good deal. However, if someone offered to sell a property to me that was in Los Angeles, San Francisco, or Seattle, I would have no idea what it's worth. That is because those cities aren't within my circle of competence.

Now for Occidental, Buffett's experience investing in oil and gas is not nearly as tenured as it is in insurance, but this isn't Buffett's first investment in the oil and gas industry. Buffett currently holds Chevron in the Berkshire stock portfolio and has previously made billions of dollars investing in the Chinese oil company PetroChina more than a decade ago. Listen to Buffett describe his rationale for the investment in Occidental:

"I'm great to have an eight percent preferred certainty oil. It's about—it's been on oil prices over the long term more than anything else. It's also a bet on the fact that the Permian Basin is what it's cracked up to be and all of that sort of thing. But oil prices will determine whether almost any oil stock is a good investment over time, whether it's Exxon or some wildcat grover. I mean that if oil goes way down, you don't solve that by hardly anything; and if it goes way up, you make a lot of money. And it's not what it does next week or next month or next year; you're buying reserves that go far out in the future. So you have to have a view on oil over time. Charlie and I have some views on that—not too specific because they're not that well informed—but we feel good about doing the financing."

The next concept for Warren Buffett's investment strategy that is very relevant is the concept of margin of safety. Remember Buffett's two rules for investing? Well, margin of safety helps you avoid losing money when investing. Margin of safety is all about buying a dollar for 70 cents. Let me explain what I mean. Let's say that you have a stock you want to invest in. Based on your analysis, you believe the stock is worth 100 per share; however, the stock is currently trading at 70. The difference between what the stock is truly worth—the one hundred dollars—and what it is currently selling for—seventy dollars—represents your margin of safety when investing.

Insurance companies like Allegheny are valued based on a metric called price to book ratio. Price to book is calculated by taking a company's stock price and dividing it by its book value per share. To put it simply, a company's book value is what would be left over if the company sold everything that it owns and used that money to pay off all of its debts. The money left over would be its book value. So if a stock was trading at ten dollars per share and its book value per share was five dollars, that would be a price to book ratio of two.

Buffett's offer to buy Allegheny values the company at a price to book ratio of 1.26. Just for a reference point, this is significantly below Berkshire Hathaway's price to book of around 1.6. At a price to book of 1.26, this deal is valued below other insurance companies. Insurer Markel, which is essentially a larger version of Allegheny, currently trades at a price to book of around 1.5, and Chubb has a price to book of over two. Keep in mind that Allegheny is unique among mid-sized insurance companies in the fact that it also owns non-insurance businesses that I talked about earlier. Those non-insurance businesses alone generated 175 million dollars in after-tax profits last year.

Based on my calculations, the value of the non-insurance businesses is somewhere around 3 billion. If this is the case, then Buffett is paying around just a 1.1 price to book for the insurance side of Allegheny. Allegheny's insurance operations are high quality; Buffett is essentially paying 1.1 times book value to acquire Allegheny's insurance business. Considering the fact that similar insurance operations trade for a price to book in the range of 1.5 to 2, I would make the argument that there is a significant margin of safety in this investment.

Remember how in the clip of Buffett he talked about how the success of any investment in an oil company depends ultimately on the price of oil? One important metric to understand when evaluating oil and gas companies is their break-even oil price. This is the price of oil at which the company would break even in terms of profit. If the price of oil falls below that, the company starts to lose money. If oil prices are above that break-even price, then the company is profitable. Occidental's current break-even price is less than forty dollars per barrel. This means when oil is above forty dollars per barrel, the company is profitable. The higher oil prices go, the more money the company can make. Oil prices have recently spiked above 100 a barrel.

The difference between the price of oil and the break-even price of Occidental is one way to evaluate the margin of safety of the investment. Buffett buying more shares of Occidental is essentially him saying that he doesn't know exactly what will happen with oil prices, but he believes they will stay firmly above Occidental's break-even price. If prices stay above 100 per barrel, Occidental will be printing money.

I hope this video is really helpful for you guys. Make sure to hit the like button and subscribe to the investor center because it really helps out the channel. If you're interested in seeing what stocks I own in my personal portfolio, make sure to check out my Patreon at the link in the description because this is where I upload all the spreadsheets and tools I use to analyze stocks. There's a ton of valuable resources on there, and I upload new things every month. As always, thanks for watching, and I'll talk to you again soon.