Amidst the craziness in financial markets right now, there’s only one thing that’s certain: when it comes to valuations, nobody knows anything. Morgan Stanley can be cheap one day at $30 a share and then expensive the next day at $20: everything is incredibly fluid, and trying to make long-term investment decisions in the eye of a hurricane is a great way to lose a lot of money very fast.
For that reason, I admire Warren Buffett’s decision to sit this crisis out on the sidelines and not give in to the temptation to try to buy financial assets on the cheap. Yes, he’s a value investor — but values change over time, and Buffett likes the kind of assets where values rise slowly over the course of years, rather than falling precipitously over the course of minutes.
Which doesn’t mean Buffett isn’t buying. Quite the opposite: he just plunked down $4.7 billion, in cash, for Constellation Energy. Constellation has very strong real-world fundamentals:
Constellation Energy, a FORTUNE 125 company with 2007 revenues of $21 billion, is the nation’s largest competitive supplier of electricity to large commercial and industrial customers and the nation’s largest wholesale power seller. Constellation Energy also manages fuels and energy services on behalf of energy intensive industries and utilities. It owns a diversified fleet of 83 generating units located throughout the United States, totaling approximately 9,000 megawatts of generating capacity. The company delivers electricity and natural gas through the Baltimore Gas and Electric Company (BGE), its regulated utility in Central Maryland.
Constellation was being hurt hard by its energy-trading activities, which had enormous liquidity needs and were hurting the company’s credit rating. Now that Constellation has all the liquidity and ratings support it needs, it should be a nice little earner for Berkshire Hathaway.
Today’s Lesson from Warren, then, if you’re looking for such a thing, is that while chaos in the market can be a good buying opportunity, the best such opportunities are often going to arise at one remove from the market itself. Don’t buy AIG or Morgan Stanley: buy their counterparties, instead, on the cheap. Just look at where Buffett is buying, compared to how much Constellation would have cost him at any point in the past two years.