Billionaire Warren Buffett’s Berkshire Hathaway dropped 32% in 2008, the worst performance in more than three decades, as the recession forced down the value of the firm’s equity holdings and derivative bets.
Most of the stock decline happened in the last three months as Berkshire posted a fourth straight profit drop amid sagging insurance results. The company still beat the 38% tumble of the Standard & Poor’s 500 Index, the 14th year in 20 that Buffett outperformed the benchmark. Just six of 1596 US stock mutual funds with at least $US250 million in assets made money for investors this year, according to data compiled by Bloomberg.
''In 2008, there was nowhere to hide,'' said Guy Spier, chief investment officer at Aquamarine Capital Management, which holds shares in the Omaha, Nebraska-based company. ''What Buffett tries to do is ensure that Berkshire Hathaway does less badly than other companies.''
Buffett, 78, poured money into stocks as prices fell and increased Berkshire’s pace of deals as the contraction in credit markets hobbled buyout firms. Buffett spent about $US3.9 billion on equities in the third quarter, making Berkshire the biggest shareholder in ConocoPhillips, the second-largest US refiner. Berkshire announced 12 acquisitions in 2008, compared with eight in 2007, and also agreed to buy $US8 billion in preferred shares from Goldman Sachs Group and General Electric Co.
'Licking his lips'
''Buffett has the opportunity to do what he does best, which is acquire new companies at prices that have him licking his lips,'' said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire shares. ''I don’t think Mr. Buffett is bummed out at all.'' Jackie Wilson, a spokesman for Berkshire, didn’t return a call seeking comment.
But not all of his Buffet's bets have gone according to plan. Berkshire agreed in July to a $US3 billion investment in Dow Chemical Company to help finance its $USD15.4 billion takeover of Rohm & Haas. Dow shares plunged after Kuwait withdrew a deal to buy half its plastics unit for $US9 billion, prompting Standard & Poor’s and Moody’s Investors Service to cut the firm’s ratings.
Buffett’s deal called for the Dow stake to be convertible to common stock at a ratio that would put the investment in the money if the Midland, Michigan-based company’s shares exceed $US41.32 a share, which is more than twice the current price.
The investment ''is so far out of the money it won’t be profitable for years,'' Gene Pisasale, who helps oversee about $US13 billion at PNC Capital Advisors in Baltimore, said in an interview. He said the 8.5% annual payment on preferred shares seemed reasonable when the deal was struck. ''Since then, previously attractive yields now appear skimpy,'' he said.
Coca-Cola, Wells Fargo
Most of the top holdings in Berkshire’s stock portfolio, valued at $US76 billion as of September 30, have declined at least 15% in the past three months. ConocoPhillips plunged 29% in the fourth quarter. Coca-Cola, Berkshire’s top holding, dropped 14%, and No. 2 Wells Fargo & Company plummeted 21%.
Declines in the value of derivatives also pressured Berkshire shares. Buyers of the contracts would be entitled to billions of dollars from Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019. Buffett said the liability on the contracts was $6.73 billion at the end of the third quarter. Berkshire has collected $4.85 billion on the contracts and can profit from investing the funds, the firm said.
Derivative bets
All four indexes, including the Standard & Poor’s 500, would have to fall to zero for Berkshire to be liable for the entire $US35.5 billion that’s at risk, Buffett said in November. Acknowledging investor concern, Buffett has said he’d provide more information on how he calculates losses on the contracts.
The firm’s annual report for 2008 will disclose ''all aspects of valuation'' and cover ''deficiencies in the formula'' for pricing the derivatives, ''which we nevertheless use,'' Buffett said in an e-mail sent by an assistant in November.
Buffett built Berkshire over four decades from a failing textile maker into a $150 billion company by buying out-of-favor stocks and businesses whose management he deemed superior.
Berkshire gained $U4,600 today, or 5%, to $US96,600 in New York Stock Exchange composite trading. That compares with the $US141,600 closing price in 2007, when Berkshire advanced 29% for the year.
Berkshire’s 2008 stock slide is the worst since at least 1976, according to Global Financial Data, which keeps records on historical prices.
The stock plunge ''doesn’t make any difference,'' Buffett told Fox Business Network November 21.
''It’s happened to me three other times,'' Buffett said. ''It went down 50% in 1998-to-2000. I mean, I hope I live long enough so it happens a couple more times.''
p/s photo: Aum Patcharapa Chaichua
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