Martin T. Sosnoff, 03.12.09, 02:00 PM EDT
You can't argue with 60 years of Warren Buffett's investment success, but recent performance makes you wonder.Citigroup ticking at $1.40, thinking, "This octopus trades as a perpetual option." Two years ago, Citi's market capitalization measured in the hundreds of billions.
"Pull the trigger, pull the trigger," a gorgeous siren whispered into my ear. But I had lost my nerve, and I brushed her off.
"Money managers who lose their nerve should be fired!" I've said this aloud through many economic cycles, but not this one.
Warren Buffett stands as le grand fromage, bar none, and his restless, nervous energy continuously probes our churning financial world--foreign bonds, long-term puts on the S&P 500, preferred stocks, you name it.
The puts intrigue me, because he probably won't be around 15 years from now for the reckoning. Unconsciously, this is Buffett's legacy to his shareholders. "You gotta believe in America decade over decade, if not 365 days out of the year." I see him looking down from the great furniture store in the sky. "Believe! Believe!" Of note is the Japanese market, down to its level of 25 years ago. The U.S. is working on 12 years.
Few analysts follow Berkshire in any depth. Although seldom remarked, its market capitalization of $125 billion puts the rarified company among the top 25 names in the S&P 500 listings, ahead of IBM
The way Berkshire configures its asset valuation relative to the S&P 500 is special to Berkshire. They use book value, while the S&P 500 is a weighted average of market value. A public corporation can experience positive book value accretion while its stock price declines materially--Microsoft
The market swept aside Berkshire's reported 9.6% easing in book value as academic. In fact, it schmeissed Berkshire in half. It's market valuation closely followed the S&P's 2008 drop of 37%, dividends included.
Analyzing the Berkshire-Hathaway portfolio by sector raises questions. Market value is heavily weighted in financials, some $14 billion, almost 30% of total stock portfolio valuation. Holdings of American Express
If I held 30% of client assets in financials, which today are 8% of the S&P 500 Index, my partners would have pushed me out the window some 12 months ago. Our clients would have come after me with shotguns, and my little lady would have demanded I go for counseling--"or else!" We avoided banks, but MetLife
The base of Buffett's portfolio remains consumer non-durables, as in Coca-Cola, Procter & Gamble
Berkshire's acquired manufacturing, retailing and services companies show average earnings the past few years of $2 billion, so their importance to either asset value or total earnings power of the parent, including capital appreciation, is modest. They get far too much palaver in the annual report.
Last year, gross unrealized gains in the portfolio declined from $31.2 billion to $14.8 billion, mainly from portfolio shrinkage. Losses unrealized on new positions rose $4.9 billion. Nobody's perfect.
Stepping back and taking a snapshot of Berkshire's holdings, it's hard not to conclude that if bank stocks don't end their death spiral, the Russell Value Index, down 25% year-to-date, is a heavy cross to bear. Tech was a better place to invest.
Conceptually, Buffett could offset big accumulated gains in Coca-Cola with losses in Wells Fargo or Conoco, but I doubt he will do so. So far, new initiatives in oil and railroads are problematic, particularly if the recession runs longer and deeper. Recent weeks' railroad car loadings fell over 20%. Nobody modeled it that way, including me.
I find myself riffling back and forth in Berskhire's dense 96-page annual report, because the presentation suits Buffett's style rather than the readers'. I'd like to see the complete insurance business, investments and operating entities on an up-front earnings summary page. Not until page 15 do you find the portfolio holdings. The price range on the common stock is on page 95.
Berkshire stock is tied mainly to portfolio performance, not earnings of the operating companies. Berkshire's five-year cumulative return was 15%--not much to call home about, but certainly better than the S&P 500.
The summary of financial data on page 26 is inadequate. It breaks down revenues by business sector but lumps earnings on one line. Come on, Warren, give us a break! On page 9, I found the underwriting profits of the insurance entities, but not investment income, which is more conjectural in today's setting of very low interest rates.
My take on total operating earnings is flattish, with some improvement in energy and insurance but slippage in manufacturing, service companies and retail.
Unless the stock market heads due north from here, Buffett's portfolio will suffer along with everyone else's.
Investments in the insurance companies are largely in foreign government bonds, domestic corporate bonds and preferreds. Very little is held in U.S. Treasuries or mortgage-backed securities. This is a wise construct that few independent insurance companies matched. Buffett rates an A for fixed-income management.
The multibillion-dollar investments in GE and Goldman Sachs
Finally, on page 59, I found a complete income statement for Berkshire's insurance properties. There was no growth in investment income these past three years, or in pretax earnings. Insurance accounts for about half of Berkshire's total earnings. The rest is in diversified properties, also with flattish results the past three years, and probably headed down.
Investors need to question whether they couldn't do better in a monolithic property in the fire and casualty sector, reinsurance and manufacturing. Berkshire carries a goodwill component in its balance sheet of over $30 billion. Some future write-offs aren't out of the question.
An appropriate price-earnings ratio, considering the operating properties' cyclical variance, is 10 times earnings, not 15. Price-earnings ratios for all money managers these past 12 months melted down from 15 to under 10. The good thing is that ex-goodwill, Berkshire sells at book value.
Despite my enumeration of his current portfolio peccadilloes, Warren Buffett's 50-year record as a level-headed investor and businessman stands as a great role model for investing generations to come, as well as for money managers like me, similarly employed today.
Martin T. Sosnoff is chairman and founder of Atalanta/Sosnoff Capital, a private investment management company with more than $6 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser. He was a columnist for many years at Forbes magazine and for three years at the New York Post. Sosnoff owns personally and Atalanta Sosnoff Capital owns for clients the following stocks cited in this commentary: IBM, Microsoft, MetLife, Johnson & Johnson, Goldman Sachs and JPMorgan Chase.Related Links
Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter
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