The last couple of weeks we’ve been looking at how billionaire investors like David Einhorn have done when investing in IPOs.
We found that investing in IPOs has not paid off in general for the world’s most famous investors… with the exception of at least one famous investor – Warren Buffett.
Today we’ll take a look at how Warren Buffett has managed to outperform most of his peers in this particular area of the market that many people wouldn’t typically associate with the Oracle of Omaha. Let’s get started.
You can easily identify early stage investments in TradeStops because the TradeStops Stock State Indicator (SSI) is gray for these stocks. The TradeStops SSI requires two full years of daily price history before we can determine whether the SSI color should be green, yellow or red.
Stocks with a gray SSI signal have been trading for less than two years. Some current examples of gray SSI stocks in TradeStops include:
- Roku, Inc. (ROKU) which just went public at the end of September
- Brighthouse Financial (BHF) which was recently spun off from parent company Met Life
- DowDuPont, Inc (DWDP) which was the merger of two companies – Dow Chemical and DuPont
All of these stocks have gray SSIs in TradeStops. Obviously, however, they are all quite different situations. Therein lies the rub.
Our Beat-the-Billionaires system relies heavily on the TradeStops SSI system and its red, yellow and green indicators. We only invest alongside the billionaires when the SSI is not red … or gray. If a billionaire is invested in a gray SSI stock then we wait for the SSI to change to green or yellow before we’ll consider investing alongside the billionaire.
That’s proven to be an excellent strategy for most billionaires except for Mr. Buffett. When we allow our Beat-the-Billionaires system to invest in gray SSI stocks owned by Warren Buffett, the new system outperforms the original system. Check it out:
Buffett is one of the only billionaires we’ve studied where we get improved performance by investing alongside him when he picks stocks with a gray SSI. By allowing gray SSI investments, the overall return increased from 555% to 632%.
It seems counter-intuitive that someone as conservative as Warren Buffett would perform well with stocks that don’t have a long history of trading. After all, it would seem to be a difficult task trying to determine the fundamentals of these new stocks.
But Buffett has two advantages when he invests in the Gray Zone stocks.
His biggest advantage with these Gray Zone stocks is that he invested in new stocks of old companies. Buffett’s Gray Zone investments were primarily in stocks that were spun off from a parent company or were part of a merger.
Examples of Buffett’s trades include stocks like:
- Phillips 66 (PSX) which was spun off from Conoco
- Anheuser Busch Inbev (BUD) which was a merger between Anheuser Busch and Inbev
- Kraft Foods, which merged with Heinz in 2015 to form Kraft Heinz Company (KHC)
Buffett’s ownership of Kraft goes back to 2008. Here’s the chart of Kraft for the three years previous to the merger.
Companies like PSX, BUD, and KHC had financials going back decades which allowed Buffett to do the necessary research into these stocks before buying into them.
What’s the takeaway?
Investing in gray SSI stocks is more likely to be successful if the stock in question is the result of a merger or a spin-off versus a truly new-to-market type of company like Roku.
You can also just go to the Billionaires Club in TradeStops and keep an eye out for any new investment ideas from Warren Buffett that have a gray SSI.
Richard Smith, PhD
CEO & Founder, TradeStops