In recent years, Warren Buffett seems to have drifted from his roots. The legendary investor was a pure disciple of Graham & Dodd, seeking out companies that possessed clear tangible value, either in the form of a rock-solid balance sheet or under-appreciated equity in its brand.

More recently, Buffett started to look like a lot of other portfolio managers, shifting into stocks that were in high-growth mode. More important, he no longer seemed inclined to hold stocks for the long haul, shuffling some positions with — for him — a high degree of frequency. And when he bought into risky but potentially lucrative special investments from the likes of Goldman Sachs (NYSE: GS) at the height of the financial crisis, the Buffett we once knew seemed to have truly changed his stripes. (That Goldman stake is now worth more than $5 billion and will likely be bought out by Goldman in coming quarters.)

You can’t blame him. Value investing hasn’t been as profitable as in decades past and Buffett simply learned to “beat the market at its own game.” Kudos to the elderly investor for showing the flexibility to adapt to changing market conditions.

But what are we to make of his latest moves and the latest annual message? A close read shows an investor who is still shifting gears as necessary, and just maybe, he’s starting to think about his old value approach once again. The clearest sign of any concern that the recent go-go phase in the market may be troubling him: Buffett has been selling stocks but declining to re-invest those profits elsewhere. His firm, Berkshire Hathaway (NYSE: BRK-A) now has a hefty $38 billion in cash sitting idle (as of the end of 2010).

1. Bullish — but with limits
Make no mistake, Buffett remains bullish on the U.S. economy. He sees the nascent economic expansion just getting going. And in his annual message to investors, he notes that “money will always flow toward opportunity, and there is an abundance of that in America.” He’s less concerned than others that the persistent trade and budget deficits will have ruinous consequences.

But that’s not the same thing as saying the market looks attractive. After all, stocks have doubled from their March 2009 lows, and anyone that’s been in the market for decades must be thinking about booking profits when the market stages a furious rally in a short time.

To be sure, Buffett has no desire to sell off any positions that still look like real value plays. And the companies that are 100% owned by Berkshire probably aren’t going anywhere. Berkshire’s ownership of GEICO, for example, is the investment that keeps on giving. Year after year, GEICO throws off massive cash flow, and it’s hard to see how that will change, as GEICO operates in an oligopolistic industry that has major barriers to entry. Berkshire’s ownership of GEICO will likely outlast Buffett’s time on earth.

2. A post-Buffett world
Buffett turned 80 years old last August, and readers of his annual message are always looking for insight as to who will replace him as the head of Berkshire Hathaway. He’s already said that his role will be split among several executives. Some have speculated that when he steps aside, shares of Berkshire Hathaway will lose their luster. There may indeed be a knee-jerk reaction, but such a move would be short-lived. That’s because whoever succeeds Buffett will simply replicate the approach that he laid down a half-century ago. At this point, the “cult of Warren” has been institutionalized into the DNA of Berkshire Hathaway.

3. A massive nest egg and a 10,000-foot view
So what will he do with that $38 billion in cash sitting idle? He could wait for a big market pullback so that value plays again uncover themselves. Yet his bullishness on the U.S. economy means that he may not be expecting that to happen any time soon. Instead, he’s likely to look for opportunities to find solid companies that are mispriced in relation to long-term cash flow. That was the logic behind his massive $26 billion investment in Burlington Northern Santa Fe Railroad in November 2009.

Burlington is already sharply boosting Berkshire’s total cash flow, and will likely keep doing so for years to come. To be sure, fewer big fish are still around that offer really impressive cash flow yields, but look for Berkshire to find another Burlington in the next year or two. In his annual missive, Buffett coyly noted that Berkshire is on the prowl for another mega-deal. “Our elephant gun has been reloaded, and my trigger finger is itchy.”

Berkshire’s move to acquire Burlington was based on analysis of industrial and economic trends. Buffett thinks railroads have an inherent advantage over truckers, and he thinks they will have a wide moat well into the future.

If you want to invest like Buffett, you need to look at other industries from a 10,000-foot view. It calls to mind the recent comments from ExxonMobil (NYSE: XOM) that natural gas has a very bright future, even though natural gas prices are in a deep slump right now. That’s why ExxonMobil shelled out $41 billion to buy gas producer XTO Energy last June. The energy giant seeks to balance its exposure between oil and gas, so look for more deals in the future. Big long-term bets are their real value-creating approach.

Action to Take –> Buffett’s investing approach may indeed be shifting back to his value roots. He noted in his annual report that he looks for simple-to-understand businesses that are debt-free and throw off huge and consistent amounts of cash flow. What he didn’t mention in his report is that those types of opportunities could be easily had a few years ago when the market was slumping.

It will be interesting to assess his first-quarter moves to see what he’s doing with all that cash. Will he re-deploy funds back into traditional stock investments? Or will he patiently wait for several quarters — or more — to hunt the big game that he increasingly prefers?

If you’re a shareholder in Berkshire Hathaway, you may notice that the stock tends to lag robust market rallies. The asset base is ill-suited to compete with pure growth stocks. But you should be heartened by the fact that the company’s portfolio consists of a healthy set of stable, cash-flow powerhouses. In light of ever-rising stock markets and still-uncertain economic prospects in the United States, that’s a nice place to be.

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