SAN DIEGO (ETFguide.com) - Warren Buffett is finally spending some of Berkshire Hathaway's cash hoard. And he's buying a railroad company. As the greatest investor of our generation, does his latest acquisition signal a market bottom?

Dissecting the Deal

Buffett's firm, Berkshire Hathaway (NYSE: BRK-A), agreed to buy Burlington Northern Santa Fe Corp. (NYSE: BNI) for $100 a share valuing the deal at $44 billion.

Over the past year, Burlington's stock price has lagged the performance of its peer benchmark, the Dow Jones Transportation Average (NYSEArca: IYT).

How much did Buffett pay?

The analysts surveyed by Bloomberg, say he paid 18.2 times Burlington's 2010 estimated earnings, which is higher than the S&P 500's multiple according to the same analysts. Not very Buffett like, especially considering he rarely pays a premium when putting new capital to work. The only other plausible explanation is that Buffett sees hidden value in Burlington.

A Consummate Contrarian

As a contrarian to the bone, Buffett decided to pull the trigger on a company within an ailing industry

Back in 1999, Robert G. Hagstrom wrote a book about the legendary investor Warren Buffett, entitled "The Warren Buffett Portfolio". What's so great about the book, and what makes it different from the countless other books and articles written about the "Oracle of Omaha" is that it offers the reader valuable insight into how Buffett actually thinks about investments. In other words, the book delves into the psychological mindset that has made Buffett so fabulously wealthy. (For more on Warren Buffett and his current holdings, check out Coattail Investor.)

Although investors could benefit from reading the entire book, we've selected a bite-sized sampling of the tips and suggestions regarding the investor mindset and ways that an investor can improve their stock selection that will help you get inside Buffett's head.

1. Think of Stocks as a Business

Many investors think of stocks and the stock market in general as nothing more than little pieces of paper being traded back and forth among investors, which might help prevent investors from becoming too emotional over a given position but it doesn't necessarily allow them to make the best possible investment decisions.

That's why Buffett has stated he believes stockholders should think of themselves as "part owners" of the business in which they are investing. By thinking that way, both Hagstrom and Buffett argue that investors will tend to avoid making off-the-cuff investment decisions, and become more focused on the longer term. Furthermore, longer-term "owners" also tend to analyze situations in greater detail and then put a great eal of thought into buy and sell decisions. Hagstrom says this increased thought and analysis

If you've ever thumbed through a stock analysts' report, you will have probably come across a stock valuation technique called discounted cash flow analysis, or DCF for short. DCF entails forecasting future company cash flows, applying a discount rate according to the company's risk, and coming up with a precise valuation or "target price" for the stock.

The trouble is that the job of predicting future cash flows requires a healthy dose of guesswork. However, there is a way to get around this problem. By working backwards - starting with the current share price - we can figure out how much cash flow the company would be expected to make in order to generate its current valuation. Depending on the plausibility of the cash flows, we can decide whether the stock is worth its going price.

DCF Sets Target Prices
There are basically two ways of valuing a stock. The first, "relative valuation" involves comparing a company with others in the same area of business, often using a price ratio such as price/earnings, price/sales, price/book value and so on. It is a good approach for helping analysts decide whether a stock is cheaper or more expensive than its peers. However, it's a less reliable method of determining what the stock is really worth on its own.

As a consequence, many analysts prefer the second approach, DCF analysis, which is supposed to deliver an "absolute valuation" or bona fide price on the stock. The approach involves explaining how much free cash flow the company will produce for investors, over, say, the next 10 years, and then calculating how much investors should pay for that stream of free cash flows based on an appropriate discount rate. Depending on whether it is above or below the stock's current market price, the DCF-produced target

NEW YORK (TheStreet) -- Warren Buffett has long talked about investing in companies with wide "moats." Such businesses dominate their markets for years because of advantages that competitors cannot duplicate.

Longtime Buffett favorites include such powerhouses as Coca-Cola and American Express, companies that can maintain fat profit margins because of their strong brands and unique products.

Recently, Morningstar analysts studied funds that invest in stocks with wide moats. They found that the funds proved relatively resilient during the rough markets of the past year. For many investors, top wide-moat funds could make intriguing holdings that might stabilize portfolios.

The fund study was based on Morningstar's stock-rating system, which evaluates the moats of 2,000 companies. Stocks are rated as having a wide moat, narrow moat or no moat. In order to be ranked in the wide-moat category, a stock must have high returns on capital that can be attributed to factors such as patents or huge economies of scale. Companies with no moats tend to have skimpy profits and tough competition.

For the study, researchers rated funds according to the number of wide-moat stocks they held. Of the 18 funds with the highest concentration of wide-moat stocks, 17 outperformed their categories by wide margins during the downturn of 2008.

One of the top performers in a dismal year was Jensen, which takes stocks that only have long records for delivering high returns on equity. Portfolio holdings include such profit machines as Microsoft and

There's no reason to feel you have to master every market.

Financial planning is more complicated than it seems. Marc Lowlicht of Further Lane Asset Management handles the affairs of high net worth clients and spends a lot more time handling tax, estate and probate issues than he does choosing investment managers. The portfolio, he reminds us, is just one part of the picture.

So how complicated does the portfolio need to be? One consequence of the recent democratization of the markets is that virtually all investments are open to all people. Mutual funds and exchange-traded funds now mimic returns from private equity and hedge fund partnerships that are forbidden to retail investors. Stock options are now available through retail brokerages like TD Ameritrade and Charles Schwab. Foreign exchange markets are available through retail Internet platforms and through ETFs. Same with commodities futures.

The idea here isn't to say that you should never do these things. It's just that for most people a core portfolio of stocks, bonds and cash will suffice to generate good returns for retirement, college planning or to build an estate. The fancy stuff can work; it's just not required.

Nobody can master everything and, on Wall Street, few even try. Sure there are go-anywhere savants like Robert Bruce of the Bruce Fund (BRUFX) who seem as comfortable in currencies and debt instruments as they are stocks, but most people on Wall Street tend to specialize in one asset class--the currency analyst, macro-economist and stock analyst might share interests, but they don't usually share jobs. There are myriad skills to master in any one asset class.

The good news is that the typical investor really doesn't need to master them all. There's nothing wrong

Warren Buffett is the world's most successful investor and a self-made billionaire. In 2009, Buffett was ranked the world's second richest man with a personal net worth of $37 billion.
"Price is what you pay. Value is what you get."
– Warren Buffet

1. "Look at stocks as parts of business. Ask yourself, 'How would I feel if the Stock Exchange was closing tomorrow for the next three years?' If I am happy owning the stock under that circumstance, I am happy with the business. That frame of mind is important to investing."

2. "The market is there to serve you and not to instruct you. It is not telling you whether you are right or wrong. The business results will determine that."

3. "You can't precisely know what a stock is worth, so leave yourself a margin of safety. Only go into things where you could be wrong to some extent and come out OK."

4. "Borrowed money is the most common way that smart guys go broke."

5. "The stock doesn't know you own it. You have feelings about it, but it has no feelings about you. The stock doesn't know what you paid. People shouldn't get emotionally involved with their stocks."

It's 12 months later and Warren Buffett's Berkshire Hathaway is $3 billion richer.

One year ago today, on September 23, 2008, with the financial world still reeling from the collapse of Lehman Brothers just days before, Buffett stunned Wall Street with a massive vote of confidence for Goldman Sachs.

In a late-day news release, Goldman announced a private deal to sell Berkshire $5 billion of perpetual preferred stock. In effect, Berkshire was giving Goldman a massive loan. And you don't loan that kind of money to a firm you think could follow Lehman down the drain.

In that release, Buffett called Goldman "an exceptional institution" with an "unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

The next day, in an interview on CNBC, Buffett said, "The price was right, the terms were right, and the people were right."

Buffett's money, and his endorsement of Goldman, didn't come cheap.

Goldman agreed to pay Berkshire a 10 percent annual dividend on the preferred stock. That's $500 million

My, how things have changed over such a short period of time. Earlier this year when I ran a simple screen looking for stocks in the S&P 500 that traded below book value, I found that more than 20% of the index was selling below book. When I ran that screen today, I found that only 7.5%, or 37 stocks in the index, currently trade below that level. The rally has pretty much emptied the cookie jar for asset-based value investors like me.

Financials still dominate the list of course. Some of Jim Cramer's favorite regional banks are on there, with Huntington Bancshares trading at 60% of tangible book value and Fifth Third Bancorp at 80%. Jim and I are at odds over the banks, but if you favor his view over mine, I would still suggest staying with those trading below book value to lessen the risk. I think it is too early to enter the sector, but I leave it to readers to decide which viewpoint they favor. Citigroup and Capital One are also below book, but they are at the top of my "not with a gun to my head" list of stocks that I think are just too dangerous to own.

A couple of leading refiners make the cut as well. It has been tough times for the refiners as declining energy demand and high supplies have limited growth opportunities and kept refining spreads pretty tight. The U.S. Energy Information Agency estimates that gasoline demand in the U.S. will fall by 0.11% in 2009 before rebounding in 2010 by 0.55%. Demand for distillates such as heating oil and diesel fuel is expected to fall 8.35% this year and rise 3.31% in 2010. As a result of this weak demand, refining margins are expected to tighten by 11% this year and widen by just 1% in 2010. With poor refining trends, the stocks are cheap.

In spite of the outlook, I like the refiners below book value. The idea of buying assets that are fairly

Despite the pundits' pronouncements of green-shoots or signs that the economy is on the mend, many investors remain scarred and understandably sensitive to the previously unimagined threats to capital market stability. In many cases, not only have they reduced their equity exposure to levels that will not help them beat inflation, many have pulled out of the publicly-traded markets entirely, and remain on the sidelines.

Return to Investing
If you are planning to retire on the assets you have accumulated or are accumulating, you need to get exposure to the equities markets and you need to do that sooner rather than later. Global equities markets work and you deserve your share of the positive long-term returns generated by them.

Generally, market declines cause panic, to quote a study by DALBAR - a leading developer of measurement systems for intangibles, such as customer behaviors, in the financial services industry. A 2003 study by DALBAR found "motivated by fear and greed, investors pour money into equity funds on market upswings and are quick to sell on downturns." The report goes on to say that in the past 19 years, the average equity investor has earned 2.57% annually compared to 12.22% for the S&P 500 Index. This study clearly illustrates the "reactive" nature of today's investors and just how much it costs them in return. It's important to recognize how much emotions influence investing decisions most often to investors' detriment.

Keys to Excellent Returns
As investors slowly emerge from their fear-induced stupor, it is important to review important principles

I've had several discussions with friends and associates about banks recently, including with my ambitious and talented young friend Lt. Corban Bates, a recent West Point graduate. Readers may remember the excellent work he has shared with me on net-net stocks in recent months. He, along with several readers, asked me what my criteria were in compiling a list of community and regional banks to buy for the long term.

A caveat or two: All lists and screens are starting points. They are where you should start your research, not end it. Also, I am not ready to buy banks yet. I think there is another shoe to drop, but I will leave it to you to make your own timing call. Naturally, I will sound a trumpet here on RealMoney when I am ready to buy the banks.

First and foremost in my laundry list of bank-stock criteria, the bank has to sell below tangible book value. Just as in any other industry, I want to buy the assets cheaply. Takeovers in the banking industry are usually done at a multiple of book value for a healthy institution. Not only does buying healthy assets at a discount give me a margin of safety, it creates tremendous upside potential because small banks will usually trade up to a small discount to the takeover multiple currently being used. I have seen the multiple of tangible book value get as high as 3 in a merger wave.

Second, the bank must have a tangible equity-to-assets ratio of at least 5%. That is the number Peter Lynch set out years ago in his book, and assuming he is a bit smarter than I am, I use that level to find banks with adequate capital. I have used this number for years, and it has worked very well over time. Higher is better with this number. The more equity relative to assets a particular bank has, the larger my

Warren E. Buffett has two cardinal rules of investing. Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.

Well, a lot of old rules got trashed when the financial crisis struck — even for the Oracle of Omaha.

At 79, Mr. Buffett is coming off the worst year of his long, storied career. On paper, he personally lost an estimated $25 billion in the financial panic of 2008, enough to cost him his title as the world’s richest man. (His friend and sometime bridge partner, Bill Gates, now holds that honor, according to Forbes.)

And yet few people on or off Wall Street have capitalized on this crisis as deftly as Mr. Buffett. After counseling Washington to rescue the nation’s financial industry and publicly urging Americans to buy stocks as the markets reeled, in he swooped. Mr. Buffett positioned himself to profit from the market mayhem — as well as all those taxpayer-financed bailouts — and thus secure his legacy as one of the greatest investors of all time.

When so many others were running scared last autumn, Mr. Buffett invested billions in Goldman Sachs — and got a far better deal than Washington. He then staked billions more on General Electric. While taxpayers never bailed out Mr. Buffett, they did bail out some of his stock picks. Goldman, American Express, Bank of America, Wells Fargo, U.S. Bancorp — all of them got public bailouts that ultimately benefited private shareholders like Mr. Buffett.

If Mr. Buffett picked well — and, so far, it looks as if he did — his payoff could be enormous. But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter

It may have been written off as a hopeless case less than a year ago, but the stock of the American International Group shot up to $50 on Thursday, capping a fourfold gain in the last two months.

For all the optimism taking hold in the markets these days, it is hard to find a tangible explanation.

"Who would want to buy a stock that's still 80 percent owned by the government?" wondered William T. Fitzpatrick, an equity analyst at Optique Capital. Shares ended the day at $47.84, a gain of 27 percent from the previous close of $37.69.

Yes, the company has named a new chief executive, who comes from a solid background at MetLife, and yes, he has said that A.I.G. will pay back the government for its bailout sooner rather than later. The giant insurer has been moving to change the names of key business units and working to disentangle its bewildering structure. It even reported a profit in its latest quarter.

But none of that really explains the recent gains. Speculation swirls daily that some deal may be in the works, that short sellers are being squeezed out of their positions, or that the company's former chief executive, Maurice R. Greenberg, may be poised to make a comeback in the role of consultant. The new chief executive, Robert Benmosche, has been fueling some of the interest, as he talks about seeking

If you're a small-business owner, you're by definition a risk-taker. The danger, however, of being comfortable with taking leaps of faith is that you can sometimes overlook smart and simple ways to minimize the damage if your leap ends in a fall.

Here are seven ways to do just that.

1. Be cash-conscious

"The number-one risk for most small businesses is improper cash-flow management," says Scott Lovingood, CEO of The Wealth Squad Inc., a small-business consultancy in Riceville, Tenn. "Calculate every month how much money you have on hand and how long it will last if your income dries up. Also evaluate monthly your total accounts payable and the number of days accounts are outstanding because a slowdown in accounts payable will lead to cash-flow crunches."

Avoid those crunches by creating a contingency plan and setting aside three to six months of operating costs in reserves. "In the contingency plan, ask where your business would be three to six months from now if you lost your biggest client," explains Lovingood. "Which expenses could you cut? Which would you have to keep paying? That number of three to six months is variable because you could have cash-flow problems for various reasons. Losing a key customer could take away 50 percent of your revenue, but it might also take away 50 percent of your expenses."

Recessions are a tough business. No matter what our instincts or advisors may tell us, chances are that our investments will suffer during a recession, whether we're too late in getting out of them, or too late to get back in. Below we expose some of the prevailing myths about recession investing, which carry one common theme among them: recessions are quite deft at rewriting old rules and breaking old patterns.

Myth No.1 - I need to be in the safest stocks to make any money.

This myth is only true before the recession takes hold. Safer, defensive stocks will tend to decline less than more cyclical names like financials, basic materials and retail stocks. But once the recession is in, the "safe" stocks may actually underperform because as soon as the market begins to rally forward again, it will be the most beaten down names that rise the fastest. So while that steady grocery store stock you held all the way through the recession may go up 10%, the beaten down bank stock may run 50% during a rebound.

So remember, once the recession is in, the most important decision is whether or not to be in the market at all (asset allocation). Once that choice is made, it's generally best to stay the course by participating in the broad market.

Myth No.2 - Bonds are the safest place to be.

This is not necessarily true. Bond prices move in the opposite direction of yields, so if you hold individual bonds and the rate of inflation rises dramatically (which can occur coming out of a recession), the price of

Some investors rely purely on mathematics when deciding which stocks to buy or investments to make. But many investors make those decisions relying to a considerable degree on imagination and faith, too.

These "story" investors envision a future path for the world, sometimes improbable, build a case for it, and then think, "How can I make money on that?"

Here are five such broad scenarios that many investors are considering today, at a moment when the economy and financial markets seem to be at a key transition point, from recession to uncertain recovery.

Some of these scenarios are in competition with each other, but all have their adherents, and all present opportunities.

1. The Jobless Recovery

In this widely held view, the recession might end soon, but businesses will be slow to hire again, resulting in a "jobless recovery." Abysmal for workers, this might not be catastrophic for stocks. Unemployment rose for more than a year after the 1990-91 recession, but stocks rose, too.

Companies that provide stuff and services that unemployed people need to survive are more likely to thrive than those offering more luxurious fare. This group includes consumer-staples providers like Procter & Gamble and Kraft Foods, discount retailers like Wal-Mart Stores, drug makers like Pfizer and utilities like Duke Energy.

More surprisingly, some analysts also believe technology and telecommunications firms can survive in a jobless recovery, too. Mobile devices are increasingly staples, and tech can help businesses boost