Buffett Makes Investing Simple
By Sham Gad February 20, 2008


Warren Buffett has been in the news quite a lot these days.

Flush with cash, Buffett is approached when the going gets tough. With the credit markets in a bit of a bind, Buffett is finding plenty of opportunity these days.

Perhaps the next big deal for Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) will involve Buffett's offer to assume liability for more than $800 billion in municipal bonds from the major bond insurers such as MBIA (NYSE: MBI), who have yet to accept.

Buffett has also been doing what he does best: plunking some serious bucks in good old-fashioned stocks. Students of investing and Fools in general would do well to copy the master and invest in simple, solid businesses.

Say cheese
Berkshire's recent quarterly filing revealed that it has amassed a nearly 9% stake in Kraft Foods (NYSE: KFT). Kraft is a clear example of the type of business that Berkshire loves to own.

First and foremost, it's a simple business: the sale and manufacture of food and beverages. Kraft makes products that are staples in many American households, among them Nabisco cookies, Oscar Meyer sandwich meats, and Post cereals. Kraft is the largest food manufacturer in the U.S. and second-largest worldwide; international sales comprise nearly 33% of overall revenue. With Kraft, Buffett still gets foreign currency exposure to reinforce his view on the declining dollar.

Kraft might be experiencing weakness because consumers are shifting to cheaper generic products. But the company's broad product array and wide geographic footprint can reassure investors.

After the announcement of Berkshire's position, shares of Kraft popped up. This increase in price is a phenomenon often referred to as the "Buffett premium." Still, with current share price increases, Kraft pays a juicy 3.4% dividend.

Planes, trains, automobiles ... and banks
Not to be outdone, Berkshire now has NetJets, which supplies jet charters, aircraft management, and corporate travel services, as well as cars and trains via CarMax (NYSE: KMX) and Burlington Northern Santa Fe (NYSE: BNI).

Now, amid all the banking turmoil, Buffett has been adding to his stake in ... Wells Fargo (NYSE: WFC)?

Buffett's attraction to Wells Fargo involves how it will play out in the long term. The company's return on equity and return on assets are about 17% and 1.5%, respectively. For a bank, these are very solid figures.

Wells also has a strong retail presence and has not been sloppy in its lending activities. Like all other banks, Wells has had to inject some capital, but given the stock's price performance -- stronger than its peers -- it's done just fine. And the 4.2% dividend yield looks like a solid bet with little chance of disappearing. In all, this seems to be a classic Buffett investment too.

You too must keep it simple
With the market mood so sour, current investing offers investors opportunities to own some strong, well-established businesses at great prices. You might not earn 50% annual returns by owning businesses such as Kraft, Wells Fargo, and others, but they should perform well for investors with a multiyear horizon.

Plus, the attractive dividends some of these companies are yielding suggest a high probability of market-beating returns. Buffett certainly doesn't invest unless he thinks he will do better than the indexes. So can you, if you are patient.