August 4, 2009 |
Clarifying why he boldly declared "Warren Buffett is an idiot" earlier this year, CNBC contributor Dennis Gartman explained:
I think Mr. Buffett made some terrible mistakes last year ... The fact that Mr. Buffett was down, what, 45%, that Berkshire was down 45%, and that not enough action was taken to mitigate those losses, I thought was disconcerting and poor trading ... when you're down 45% for a year, I'm sorry, that's inexcusable.
Interesting ... and kinda stupid
Mind you, Buffett has spent the better part of a lifetime belittling "traders," comparing them to those who engage in one-night stands and call themselves romantics. And while Berkshire's stock may have been down an "inexcusable" 45% in 2008, its book value declined a more modest 9.6%, outperforming the S&P 500 by the seventh-largest margin ever.
Gartman's claim is based on logic that made him look like -- to be fair here -- a big idiot.
But further defending Buffett is in order. And not because it's cool to bow at his feet and assume he can do no wrong, but because some of Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) investments made over the past year have already raked in billions of dollars in profits and gains.
A big factor fueling Berkshire's 2008 decline was a series of equity puts it sold over the past several years. If global markets so much as stayed at then-current levels between 2019 and 2028, Berkshire could have been on the hook for tens of billions of dollars in losses (although it received nearly $5 billion in premiums up front, which it could invest to offset potential losses -- the initial deal wasn't that bad for Berkshire to begin with).
But as my Foolish colleague Anand Chokkavelu noted, a hedging oddity allowed Buffett to quietly renegotiate some of these contracts without exchanging a penny. In one example, the strike price on S&P 500 puts was cut from about 1,500 down to the high 900s. In return, the expiration date dropped from 18 years out to 10 years out.
With the S&P 500 now above 1,000, those equity puts are back "in the money." For the contracts to cost Berkshire one penny, the S&P 500 would have to be lower than it is today 10 years from now. That could happen, but it's not the kind of risk investors need to get queasy over. The new terms are far more favorable for Berkshire investors than the old ones were -- and it didn't cost them one dime.
But these jeers were irrational. Berkshire didn't buy common shares, but preferred stock yielding 10%, which came with a bundle of free warrants to boot. Better yet, the common shares tied to these warrants have rebounded, racking up gains.
Berkshire's investment in Goldman Sachs, for example, is now worth more than $9 billion, according to Linus Wilson of the University of Louisiana. That's $4 billion or so more than it paid last October.
Amazingly, Goldman's surge places it as one of Berkshire's top investments in public companies:
Current Value of Berkshire Holding*
Coca-Cola (NYSE: KO)
Wells Fargo (NYSE: WFC)
Procter & Gamble (NYSE: PG)
*Using shares owned as of March 31, 2009, and share price as of Aug. 3, 2009.
The General Electric warrants haven't been as prosperous -- shares currently trade for less than the warrant's strike price -- but more than four years remain for things to pan out before they expire. Ditto for the Goldman warrants, of which Buffett recently explained, "Every instinct in my body tells me that we will want to hold those warrants until they're very close to their expiration date."
In the meantime, the preferred shares pay a combined $800 million a year in dividends. Not bad for two investments made over a few casual phone calls.
Diverting from a famous avoidance of all things technology, Berkshire plowed $230 million into a Chinese battery and electric car company called BYD last fall.
In the months since, BYD shares have surged fivefold, leaving Berkshire with a $1 billion paper profit. Adding to the allure of long-term potential here, co-chairman Charlie Munger recently went out on a limb, saying BYD's founder and CEO is "likely to be one of the most important business people who ever lived," comparing him to a cross between Thomas Edison and Jack Welch.
BYD hopes to sell 700,000 cars in 2010. That's more than four times what it sold in 2008.Moving on
"Idiot" is a relative term. Berkshire, in some eyes, is making some of the shrewdest and most promising investments it's ever made. When you couple that to a stock trading well below its historical premium to book value, things haven't look this bright for Berkshire investors in a long time.
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