Buffett Investment Research

Views 12682024.05.22

Yacht Point Deployment? Gain experience from the master's story

Faced with significant short-term setbacks in stock holdings, investors are anxious and confused: What is the reason for the decline? Has there been a major change in the fundamentals of the company? And what strategies to take to protect existing investments in the face of market turbulence and even seize potential rebound opportunities?

In particular, there has been a certain degree of pullback in recent times for equity investors, and today we are talking about a classic case of what to do after a stock market crash?

Case Study: From Pain to Recovery: Buffett's Wavering Journey with Western Oil


In 2019, the global energy market was in full swing and oil prices fluctuated sharply. At the time, Western Oil, an American shale oil giant with a market value of billions of dollars, was experiencing industry lows. Buffet had a keen eye for insight into the value it contained. He first threw $100 million into buying a preference stake in Western Oil, an investment in a similar bond that brought the Berkshire Hasawi company stable dividend income and some security protection. However, this is only a prelude.

Subsequently, Buffett further demonstrated its strength by gradually opening up the common stock of Western Oil. In the fourth quarter of 2019, his hand grew and by the end of the year he had invested about $8.3 million and bought nearly 1900 million shares. However, fate seems intent on testing this investment master. In early 2020, the COVID-19 pandemic swept the globe like a storm, financial markets panicked, energy demand plummeted, and oil prices fell to historic lows. Western oil prices plunged, putting Buffett's investments under heavy pressure.

Faced with sudden adversity, even Buffett has to make tough decisions. Faced with fiscal losses, he opted for a temporary “cutback” and cut some Western oil stocks to ease portfolio risks. This move may seem at odds with his “buy and hold” philosophy from the outside world, but embodies the wisdom of his flexibility in dealing with market changes. However, the story did not end there.

In time for 2022, as the global economy recovers, a reshaping of the energy supply landscape, a strong rebound in oil prices, and a significant improvement in the business situation of Western oil. At the same time, Buffett again showed its ability to grasp the timing of the moment, throwing down $70 billion in just two weeks, taking a 14% stake in Western Oil, and its shareholding ratio soaring, showing strong confidence in the oil giant's prospects. This move highlights not only his continued interest in the traditional energy industry, but also his lively practice of understanding market cycles.

Summarizing this tortuous investment history, we see not only that Buffett has failed decisions in the face of market turbulence, but that he adheres to the principles of value investing in adversity, while not losing the wisdom of flexibility to adapt. His “cut of meat” was not a complete abandonment, but a tactical adjustment; his subsequent “redeployment” was a strategic regression based on deep analysis and firm conviction.

So when Buffett invests in Western Oil, we can learn a few lessons:

(1) Long-term perspective and value investing principles:

In the face of short-term price volatility, it should not be easy to shake the judgment about the long-term growth potential of a good company, but rather the focus should be on “whether the fundamentals of the business have deteriorated” and, if future valuations are too high, then “will future growth digest valuations”? Buffett's decision to expand Western Oil is based not only on stock price movements, but on in-depth research into fundamental factors such as the company's financial condition, operating strategy, and industry position. When faced with a covered stock, investors should keep an eye on business dynamics to assess whether fundamentals remain stable or if there are signs of improvement, as an important basis for holding or adjusting positions.

(2) Timely position adjustment:

Even long-term investors like Buffett need moderate tactical adjustments based on market conditions and portfolios. Although he fell as Western oil prices fell, he quickly increased his investment in the company's fundamentals and favorable market conditions. This encourages investors to stick to value judgments and be flexible when faced with covered stocks, adjusting their holding structure in time to optimize costs using market volatility.

(3) Reasonable use of derivatives:

When investing in Western Oil, in addition to buying shares directly, Buffett also gains stable returns and retains the right to grow at lower prices in the future by purchasing preferred shares and warrants. Investors can borrow from this strategy and use derivatives (such as options, warrants, etc.) to hedge risks or create additional profit opportunities, such as falling, we want to continue buying, look at whether we can sell bullish options that are ahead and above the cost line, but do not fully cover the position, to sell a call Receive some royalties;

If we used the same strategy to review recent declines, what kind of checklist could we have? '

Although Buffett has historically experienced short-term losses, it is also normal for us to have some looks at the eyes, and the volatility of the stock price is very dramatic, and we believe that no change is the best strategy, so we need to judge by logic tree:

The first thing to determine is: What are the long-term fundamentals of the company?

In the long run, the rise and fall of stocks depends on: increase in earnings per share* Increase in valuation+return for shareholders.

We need to judge fundamental factors such as the company's financial condition, operating strategy, industry position. If the overall trend is good, the health of the company's revenue and profit in particular will directly determine the change in earnings per share. When the fundamental long-term is good, we then determine “valuation”.

For a growing company, we need to determine whether the size of its long-term growth will hold up to valuation levels, in other words, “Can investors imagine what the business will turn out to be after a few years, will it not have higher revenue margins, or will it go down the road?”

If we determine that future business growth will digest valuations and continue to grow, then what we need to do now is “optimize cost structures with trading strategies”, such as:

(1) Still have cash in hand, do you want to replenish the deposit?

In fact, it is possible to obtain a cash return by selling the bearish option, paying the option fee on a regular basis, placing the cash part in the cash reserve, and if the fall breaks through the option price, we can exchange the amount in the cashback into shares;

(2) What if there is no cash in hand or even financing?

If the financing leverage is too large, it is recommended to pay attention to the risks and reduce the financing leverage slightly so that you can take on more risks to overcome the bulls. Secondly, if you want to sell back, you can conduct a “clearing strategy” on some of the positions, that is, sell a call above the cost price. Once the cost rises above the cost price, you can sell the book back and receive the option fee, at which time you can earn the option fee if you have not had a right.

(It is very good to recommend learning an investment course on options in the APP)

So there are investors who think, “What should I do if I feel that the company has no investment value when judging the value of the business”, then for a company with no investment value, we think that long-term investment will be unprofitable, whether it is long term or trading, it will be very difficult.

Another investor asked, I just traded and didn't understand the basics, now I'm covered. What should I do?

At this point, for investors who trade, we need to look at the trading strategy at the time? Is it a trend tracking strategy? Or an event-driven strategy? We have no set stop loss/stop profit lines, and there is no strict execution if the strategy is set according to technical indicators before entering.

Therefore, for fundamental investors, starting from the fundamental side of the business, from a valuation perspective, and using some options strategies, it is better to review the holding company and adjust the strategy during a fall; for transactional investors, from the dimension of the trading strategy, strictly execute the trading strategy, which is a long-term strategy. The key to victory.

Of course, there is a lot of overlap between these two types of investors. Investors who combine fundamental trends and trading are like masters at the same time who need to understand fundamental trends and study the psychology of trading, and will be much easier to do. Investing.

In the face of a fall, we must not mess up our feet, like two armies facing each other. We have a stable footing, have mastered our strategic tactics, and naturally know that we know each other's 100 victories.

$Berkshire Hathaway-A(BRK.A.US)$
$Occidental Petroleum(OXY.US)$
$S&P 500 Index(.SPX.US)$
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$Nasdaq Composite Index(.IXIC.US)$
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