Monday, March 28, 2016

W. Buffett and Kinder Morgan Inc.

A lot of speculation has been thrown around lately about Buffett's bet on oil giant, Kinder Morgan (KMI). The bets have been about whether or not he has been profitable on it, whether or not this is one of his few losing bets that he's made, and even if this was some sort of outcome he didn't predict. After all, so many investors wait on his moves and simply follow him on his trades without a second thought. It leaves a lot for the movement of a stock. Therefore, today I want to discuss the bet the Buffett made on Kinder Morgan.

Buffett made his gamble on KMI back when the stock had supposedly hit rock bottom - when it was trading in the low twenties to high teens per share. With that being said, the stock now trades in the high $17 range for the day (currently as I write this article). This means that Buffett likely has yet to make a profit unless he was lucky enough to bag his two million plus shares of the company for a slash off the top. This being unlucky, it's more likely that he had to pay a premium to obtain them as such a large number would not come easy. Buffett then would be said to have to break the low twenties in order to become profitable on his stock pick this time around. If you do the math, that means that Buffett even just currently is down a massive percentage on today's market. Needless to say though, the amount were talking about is such a small blip on the radar of a company as big as Berkshire so the returns are negligible at best.

This leads us to the discussion as to whether or not this will be one of Berkshire and Buffett's losing bets that are made every so often. Buffett doesn't make many losing bets although historically, he has made them just like any seasoned investor. Stock trading or investing is a business partially of luck. All one can do is look at the numbers, see if they stack up, and if they all line up right, throw your money in and pray you did your homework. Buffett has to work along the same lines unless he is gaining information through insider trading (we can debate this later). Regardless, after Buffett made his move, investors from far and wide followed him in as they always do and the stock bumped a little upwards. It however plummeted back further down afterwards as the stock itself was no more profitable than it was the previous day. Let us remember however that Buffett is after all an investor and not a trader. There is a huge difference when it comes to the market. On almost every buy, Buffett enters into the business with the expectation that it will be down for awhile and then it will bounce back as the market seems to almost always do. As long as a company has a good head on the boat and is profitable to some degree, the stock will ultimately come out on top eventually. This is the bet that Buffett is making. So far, it doesn't appear that he is going to see this fabled bounce back up into the high range that KMI once had but over time, as long as it doesn't turn over, the oil business will likely return. After all, politicians need to get paid!

Finally, I'd like to discuss if this was even something that Buffett saw coming. Buffett is a smart guy. The people at the top of the mole hill don't just fall there by accident. They get there by having the wit and smarts to fight their way to the top and hold onto their money in smart ways without spending it frivolously. This is especially true if you are familiar with his background. That being said, even with all the brains in the world, investors like Buffett with without fail be beaten by the market once and awhile. It's the nature of the business. Do I on the other hand believe that this may not have turned out as Buffett intended it to turn out? Absolutely; this is exactly what I believe. When a man like Buffett invests, the stock he invests in usually bumps right back up and stays up past his initial bet. I believe that he knows how much weight he and his company carry and he uses this to his advantage as he should. If you know you're playing with a stacked deck, why wouldn't you develop the balls to eventually throw it around and bully the market into doing what it normally wouldn't do? I suppose I might do the very same thing if it were in my cards. Buffett shows time and time again that if he backs something, the market reacts and supports him. This is due partially to his history of getting bets right but also just that he has incredible abilities that allow him to evaluate stocks to see if they have the potential to bounce back if he places his seal of approval on them. Buffett is a smart man and Kinder Morgan Inc. is a mammoth of a company that will not be toppled easily.

With this being said, I ask once again about whether or not he has been profitable on his investment with KMI, whether or not this is one of his few losing bets that he's made, and even if this was some sort of outcome he didn't predict? I truly believe that Buffett has yet to be profitable on this particular bet. I believe that this may be one of the few that he doesn't end up being profitable with. I also believe that this was a bet that was made with the expectation that his name would carry a little more weight with a company like KMI on the line. Only time will tell however. Until then, I sit anxiously wait to see the outcome.

Full disclosure: KMI investment not in the foreseeable future


  1. I do not think this was Warren's purchase. He said he was surprised by the purchase in a CNBC interview. Apparently the buy was made by either Todd Combs or Ted Weschler.

    1. Link to video where Warren discusses the Kinder Morgan position:

    2. Anon,

      Thanks for stopping by and thank you for posting the link - always good to know the source if quoted. I've seen the video and I'll be honest, I don't buy into it. A man like Buffett, being CEO, would not simply let some of his company be used in a manner that wouldn't fit his investing style. I like to look less at what is being said and more at what is being done. Actions speak a hell of a lot louder than words. Hell, even in the video, he says that he gives them a little money to play around with (a couple billion) but that if he were going to buy some, that he'd look to later raise his stake even higher (eluding to that fact that he could still be behind it). We are all entitled to our opinions though. I choose simply to not believe what is being said and instead trust what I'm seeing.