How to Outperform Warren Buffett and Earn 30% Annual Returns

You can do better by setting buy limit orders at “dream” prices. Those who bought near the $28 bottom for Enterprise Product Partners on March 15^th are up more than 50 percent already.

– Roger Conrad, MLP Profits

If you read my article earlier this week SEC to Warren Buffett: We Know How to Value Stocks Better than You, you may find the title of today’s article hypocritical. After all, two days ago I criticized the SEC for claiming to be a better investor than Warren Buffett, so how can I now claim to know how to beat Warren Buffett’s performance?

The difference is that my investment advice comes from Warren Buffett himself! But I’ll write about the honest way to beat Buffett next week. Just last night, I learned a second, dishonest way to beat Buffett:

1. meet with investment bankers and ask them to contact one of its clients about a possible takeover;

2. buy the takeover target’s stock;

3. meet with the CEO of the takeover target and convince him to accept a takeover offer;

4. soon thereafter, recommend to Buffett that he acquire the takeover target at a significant premium;

5. sit back and count your stock profits when Buffett agrees to acquire the company.

This is the road to riches David Sokol, Chairman of Berkshire subsidiaries MidAmerican Energy and NetJets, took in the case of Lubrizol (NYSE: LZ), the cleantech lubricant- additive company that Buffett recently agreed to acquire for $9 billion. According to a Lubrizol proxy statement (pp. 18-20) and a Berkshire press release, here is the timeline:

David Sokol Timeline

December 13^th, 2010: Sokol meets with Citigroup investment bankers about a possible takeover of Lubrizol. Citigroup told Sokol that it would approach Lubrizol CEO James Hambrick about Berkshire’s interest.

December 14^th, 2010: Sokol buys 2,300 shares of Lubrizol in anticipation of Lubrizol board meeting that same day.

December 14^th, 2010: Lubrizol holds regular board meeting but does not discuss Berkshire’s indication of interest.

December 21, 2010: Sokol sells the 2,300 shares of Lubrizol, apparently disappointed that Berkshire’s indication of interest was not discussed at Lubrizol’s December 14^th board meeting.

Late December, 2010: Citigroup bankers inform Sokol that Lubrizol will hold a special board meeting on January 6^th to discuss Berkshire’s indication of interest.

January 5^th through January 7^th, 2011: Sokol buys more shares of Lubrizol which total 96,060 shares at prices between $103 and $104 per share.

January 6^th, 2011: Lubrizol board holds special meeting to discuss Berkshire’s indication of interest.

January 14^th, 2011: Lubrizol CEO calls Sokol and expresses interest in a face-to-face meeting.

January 15^th, 2011: Sokol informs Buffett that Lubrizol is interested in discussing a possible acquisition. Sokol tells Buffett he owns stock in Lubrizol, but does not tell Buffett when he bought the stock and Buffett does not ask.

January 25^th, 2011: Sokol and Hambrick have dinner together and Sokol suggests that Hambrick meet with Buffett to discuss price. Hambrick agrees to meet with Buffett.

February 8^th, 2011: Hambrick and Buffett meet. Buffett offers to buy Lubrizol for $135 per share.

March 14, 2011: Berkshire and Lubrizol announce the takeover agreement.

March 19, 2011: Buffett first learns when Sokol’s prior purchases of Lubrizol stock occurred (i.e., soon after takeover discussions began).

March 30, 2011: Sokol resigns from all of his executive positions at Berkshire.

David Sokol Makes 30% Profit in Two Months

Given the $135 takeover price for Lubrizol and Sokol’s average $103-$104 price in acquiring Lubrizol shares, Sokol pocketed a quick 30% return in a little more than two month’s time. Not bad! Since Berkshire’s annualized return over its 46-year history is around 21%, Sokol’s Lubrizol investment substantially outperformed Warren Buffett!

Insider Trading and Other Forms of Dishonesty

This timeline reeks of insider trading by Dave Sokol. Yet, in yesterday’s press release, Buffett states that “neither Dave nor I feel his Lubrizol purchases were in any way unlawful.” Come on, Warren, how can you say such a thing with a straight face! I am disappointed in Buffett’s lack of candor, just like I was disappointed last June concerning his testimony about Moody’s (NYSE: MCO) before the Financial Crisis Inquiry Commission (FCIC).  

Don’t get me wrong — I don’t think that Buffett was complicit in Sokol’s insider trading. My disappointment simply revolves around Buffett’s lack of honesty in discussing Sokol’s resignation. The press release says that Sokol’s Lubrizol stock purchases “were not a factor in his decision to resign” and that Buffett was “surprised” that Sokol decided to resign. Both of these statements are lies. 

Why Berkshire Hathaway Fell on the News

News of the resignation came after the market close yesterday, and Berkshire Hathaway stock promptly fell more than 3% after hours. Investors didn’t like this news for three reasons. First, it sullies Buffett’s reputation as an honest, grandfather figure. Second, there is likely to be an insider trading investigation of not only Sokol but Buffett’s potential role. This investigation will probably be a significant distraction for Buffett, which will hurt his ability to maximize shareholder value in the coming months. Third, Sokol’s resignation increases uncertainty concerning Buffett’s successor at Berkshire. Buffett is 80 ½ years old and his sidekick Charlie Munger is even older at 87. It was widely expected that Sokol would assume the Berkshire CEO position after Buffett’s retirement or death.

Ajit Jain is the New Heir Apparent

Who is Buffett’s likely successor in the wake of Sokol’s resignation? The new frontrunner is Ajit Jain, head of Berkshire’s reinsurance businesses. On March 22nd, during his trip to India, Buffett told reporters that Berkshire’s board favors Jain to succeed him as CEO. Is it just a coincidence that Buffett gave the nod to Jain only three days after learning about Sokol’s insider trading? I think not.

Stay Tuned

You don’t need to invest in Berkshire Hathaway to earn Buffett-like returns. In fact, next week I’ll show you how to beat Warren Buffett at his own investment game. Insider trading is not required.

Find the Best Tax-Advantaged Energy MLPs with the Help of MLP Profits!

You don’t need to engage in insider trading to profit handsomely from investing in energy-based MLPs. In fact, Roger Conrad, co-editor of the market-beating MLP Profits investment service, recently wrote to subscribers:

It’s still possible to buy high-quality MLPs yielding between 5 to 9 percent, and these companies are poised to grow those dividends anywhere from 5 to 10 percent.

Over the long term MLPs’ unit prices follow distributions higher. As a result, dividend growth for our favorites adds up to annual returns of 10 to 19 percent. That’s superior to almost anything else I can think of, particularly anything that’s tax-advantaged, as MLPs are.

To find out the specific names of the energy MLPs Roger likes best right now, give MLP Profits a try today!