A Buffett investment that wasn't

Buffett likes established brands with strong industry positions, but reports of his investment in CarMax were greatly distorted.

More from Fortune

GM's new CEO gets cracking Enron, welcome to Broadway Long-term prospects for a temp staffer

FORTUNE 500 Current Issue Subscribe to Fortune

(Fortune) -- With auto stocks beaten down, prominent investors looking for bargains have been on the prowl. Kirk Kerkorian bought nearly 10% of General Motors's shares last year, which he subsequently sold, and Cerberus Capital Management, the private equity group, took majority control of Chrysler earlier this year.

Last week, it began to look as if CarMax, one of the pioneers of the used-car superstore, had become the next target. Legendary investor Warren Buffett was said to be buying in. Headlines like "Buffett buys major stake in CarMax" and "Buffett Buy Sends CarMax shares soaring" appeared. Copycat investors sent CarMax's stock price shooting up when the news broke on November 15.

CarMax's (Charts, Fortune 500) stock jumped $1.62, up 7.5%. But the story as reported by many news outlets isn't accurate, because Buffett wasn't directly involved in the purchase. The stock was bought by GEICO, the auto insurer and a subsidiary of Buffett's company, Berkshire Hathway. There's a big difference, as I'll explain.

On its face, the notion of Buffett's involvement was logical. CarMax had been struggling, with its stock having hit a low for the year of $18.88 a week earlier. But analysts like its business model: Clean-scrubbed salespeople, working on a fixed commission, selling high-quality used cars at a fixed price with no haggling. "We most likely concur with Warren Buffet's [sic] long-term view of CarMax's prospects," wrote Goldman Sachs' Matthew J. Fassier.

Though CarMax was facing headwinds from the expected slowdown in consumer spending, its sales were still moving up and several analysts had recommended the stock. So CarMax looked like a typical Buffett deal. The renowned value investor likes to make big, long-term bets on companies with strong brand names with straight-forward business models. What could be more straight-forward than the used car business?

But a close reading of the 13-F SEC filing by Buffett's company, Berkshire Hathaway (Charts, Fortune 500), suggests that Buffett wasn't directly involved. First of all, the size of the investment - less than 14 million shares worth $258 million - wouldn't be big enough to interest Buffett. That's pocket change for him. Berkshire recently had investments worth $108 billion so Buffett has to take big stakes in order to make a significant impact on his portfolio.

Another clue in the filing is that three of the holders of the CarMax shares are associated with GEICO. GEICO has its own portfolio of stocks, as well as its own legendary stockpicker, Lou Simpson, president and CEO of capital operations. But Simpson takes smaller positions than Buffett because he has less capital to invest. And, as people familiar with the operations of Berkshire Hathaway know, Simpson makes his own investment decisions.

Urban legend though it may be, the news of Buffett's alleged investment may be difficult to stamp out. CarMax certainly isn't trying very hard. When it heard about the Berkshire investment, it started celebrating about the fortuitous timing - the company is planning to open a new outlet in Omaha next month and had invited Buffett to the opening. "Now I'm thinking he might actually do it," Katherine Kenny, the assistant vice president of investor relations, was quoted as saying.

When informed by Fortune a few days later that Buffett himself was likely not the actual buyer of the shares, she replied: "We don't really care. We're just happy that Berkshire is interested in and confident in our business plan." Some investors seem to have gotten the message, though. The stock price has since settled back down to $21.74 - basically where it was before the Buffett reports.