From Friday's Globe and Mail Last updated on Friday, Aug. 28, 2009 07:14AM EDT
Few things are guaranteed in the investment universe, but here’s one: Whoever takes over from 79-year-old Warren Buffett as the head of Berkshire Hathaway will have a hard time filling his shoes.
That worry might explain why Berkshire’s stock has struggled lately. As I write this, the company’s class A shares—which Buffett has not allowed to split, no matter how high the price—are trading at about $91,000 apiece (all currency in U.S. dollars). The high over the past year was $147,000.
Succession worries are partly to blame: Does anyone have Buffett’s knack for putting money to work? The Oracle of Omaha has said he plans to stay on the job until five years after his death. More seriously, and without naming them, Buffett has said there are four candidates ready to take over his investment role. The current scuttlebutt is that David Sokol, chairman of Berkshire’s MidAmerican Energy, is the front-runner.
Many of Berkshire’s short-term problems are due to last year’s market meltdown, which clobbered its vast investment portfolio. Mistakes don’t help, however, particularly selling $35 billion worth of put options on stock indexes when share prices were much higher than they are now. Those options are a form of market insurance—if the holders exercise the options, the seller (Berkshire) has to pay them higher prices guaranteed in the options contracts. According to a Berkshire financial report, its paper losses were about $5 billion.
But you also have to consider Berkshire’s long-term success. The company’s share price was about $20 when Buffett took over in the 1960s. One big reason for the astonishing growth since then is that Buffett and his lieutenants often take advantage of other investors’ impatience. Most of us want a quick buck, so we ignore out-of-favour stocks that will take a while to recover. Once they do, even if Buffett didn’t buy them at the bottom, those stocks perform well.
The crisis this past year has given Buffett one of the greatest opportunities of his lifetime to put his value investing skills to work. Last October, he wrote an op-ed piece for The New York Times, saying that he was buying U.S. stocks for his personal account. Until then, that account held nothing but government bonds. Berkshire went on a buying spree, too, investing in battered blue-chip companies—including General Electric, Goldman Sachs and Dow Chemical—and others that weren’t hit as hard, like Wrigley.
In total, Berkshire has invested about $22 billion over the past year, and the clever twist is that, by and large, it hasn’t bought straight common shares. Instead, it’s invested in preferred shares that pay fat dividends and can be converted into common stock at a low price. In the case of Goldman, Berkshire bought $5 billion worth of preferreds last September that pay a 10% dividend, and that came with warrants that gave Berkshire a five-year option to buy common shares at $115 apiece. Goldman shares sank to $52 last October, but have climbed steadily to $160 lately. That’s a paper profit of $2 billion, in addition to the dividends.
So, while some investors fret about Buffett’s age, buying Berkshire today will give you at least one more chance to profit from a legend’s investing skills. Don’t count the Oracle out yet, even if he does depart soon.Related Links
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