By Erik Holm
Feb. 11 (Bloomberg) -- Billionaire Warren Buffett likes to say his favorite length of time to hold a stock is “forever.” That’s a good thing, because some of his more recent investments aren’t making him money in the short run.
Buffett, 78, ranked the richest man in the U.S. by Forbes magazine, placed bets over the past two years on firms including Kraft Foods Inc., Johnson & Johnson and oil producer ConocoPhillips. After last year’s 38 percent drop in the benchmark Standard & Poor’s 500 Index, they are among the stocks trading at less than what he paid when he last added their shares to the portfolio of his Berkshire Hathaway Inc.
The man heralded as the “Oracle of Omaha” tells acolytes he evaluates companies based on their stability, their competitive advantage and what he thinks they’ll be worth years into the future, instead of trying to find the moment when their stocks are at their lowest. The declines in his recent equity purchases suggest he could have waited before taking the plunge.
“People like to second guess Warren Buffett, but it’s not just a flip question to ask if he should have kept his powder dry a bit longer,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Ram Partners LP, a hedge fund in Greenwich, Connecticut. “He’s paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger.”
Buffett, who makes most of the investment decisions at Omaha, Nebraska-based Berkshire, is required to tell regulators about changes to the firm’s equity portfolio every three months. The latest report, covering the period ending Dec. 31, may be filed by the end of this week and will include purchases and sales made during the worst quarter for the S&P 500 in more than two decades.
‘Buying Too Soon’
In separate filings, Berkshire said it spent $9.45 billion on equity securities in the first nine months of last year, buying shares in companies including Eaton Corp., a Cleveland- based maker of circuit breakers and fuel pumps; Ingersoll-Rand Co., a refrigeration-equipment manufacturer incorporated in Bermuda; and U.S. Bancorp in Minneapolis. All of those purchases are now underwater.
“In hindsight, it’s easy to see that he was buying too soon,” said Michael Yoshikami, president of YCMNet Advisors in Walnut Creek, California, who manages $800 million and owns Berkshire shares. “He’d probably be the first to tell you that. But he and pretty much everybody else had no idea how bad things were going to get.”
U.S. Bancorp Stake
Berkshire became U.S. Bancorp’s biggest shareholder as Buffett bought the majority of his stake in a period when the stock never fell below $29.09. He added shares in the third quarter of 2008, during a three-month span when the stock’s minimum price was $20.57, according to Bloomberg data. The bank reported profit declines for eight straight quarters. Its stock closed at $14.40 on the New York Stock Exchange yesterday.
Berkshire increased its Ingersoll-Rand stake sixfold in last year’s second quarter, when the shares never fell below $36.54. Since acquiring the stock, which gives Buffett about 1.8 percent of the firm, the price has fallen more than 50 percent. Profit at Ingersoll, which makes Thermo King and Hussman refrigeration equipment, has fallen in three straight quarters.
Buffett first bought Eaton shares between July and September of last year, a period in which the stock never fell below $52.32. The company said in January that it was cutting 5,200 jobs and forecast that it would “break even” in the first quarter. The shares closed at $43.02 yesterday.
“He’s not the kind of guy who goes around kicking himself, but it’s pretty clear that some of these are much, much cheaper than when he thought they were a good deal in the first place,” said Gerald Martin, a professor at American University in Washington who has studied Buffett’s investment history. “He knows better than anyone that the economy goes in cycles, so when he buys into something he’s not too worried about trying to figure out where the bottom is.”
Berkshire’s stock has declined 36 percent in the past year, through yesterday, and profit has fallen in four straight quarters.
Buffett has said he’s also spending his own money to buy U.S. stocks as prices decline amid the worst financial crisis in 75 years, switching holdings from government bonds.
“Most major companies will be setting new profit records 5, 10 and 20 years from now,” Buffett said in a column in the New York Times in October, warning that investors who sat on the sidelines were ignoring advice from hockey great Wayne Gretzky, who said: “I skate to where the puck is going to be, not where it has been.”
Buffett is finding other opportunities for Berkshire amid the economic turmoil, funding buyouts, buying preferred shares in private deals and acquiring whole companies. In April, he committed $6.5 billion to help McLean, Virginia-based candy manufacturer Mars buy chewing gum maker Wm. Wrigley Jr. Co. In September and October, he agreed to spend $8 billion on preferred shares of General Electric Co. and Goldman Sachs Group Inc. that pay 10 percent annual interest.
Later deals have yielded even more favorable terms. In the past week, Buffett agreed to buy preferred shares in Milwaukee- based motorcycle maker Harley-Davidson Inc. that pay 15 percent and Sealed Air Corp., an Elmwood Park, New Jersey, packaging company, paying 12 percent.
“I wouldn’t be surprised if there’s not much news from the fourth quarter,” Yoshikami said, referring to Berkshire’s next stock-purchase disclosure. “When you can get a 10 percent return that’s virtually guaranteed on preferred shares, why buy stock? People complain that Buffett is less adaptable than he used to be, but that’s not true. I bet he has learned from some of these recent mistakes.”
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