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The Equitymaster Research Digest

What Buffett and We Look at When Investing in Oil...
May 18, 2016

In the last year, Warren Buffett has made some investments that have raised quite a few eyebrows. One of them was Precision Castparts. At US$32.4 billion, many consider this Berkshire Hathaway's largest acquisition in terms of value. Besides making nuts and bolts for the aerospace industry, a portion of Precision Castparts' revenues come from the oil and gas sector.

Berkshire also disclosed a US$4.5 billion stake in Phillips 66, an energy company. This once again invited scepticism in a very low oil price environment.

Some other investments in the Berkshire portfolio have also been hampered by the oil price plunge.

Clearly, Berkshire Hathaway is finding value in not just oil companies but companies whose fortunes are linked to the oil sector.

So naturally, at the recently concluded Berkshire Hathaway AGM (which was webcast live on Yahoo!), Buffett was asked to give his views on oil and commodities in general.

And unsurprisingly, Buffett hadn't the faintest idea:

  • We don't think we can predict commodity prices. We don't hedge cocoa or sugar at any rate. We do some forward buying of chocolate coating or something. But basically we are not two fellows who think we can predict the price of soybeans or corn or oil or anything else. So anything you have seen in our investment transactions - some of the securities you mention there were bought by Todd or Ted and one was bought by me. But neither they nor I bought those or if we sell them sell them based on commodity price predictions. We don't know how to do it. And we're thinking about other things when we make those decisions.
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