Wednesday, September 9, 2009

Oracle of Omaha bounces back

Business Times - 09 Sep 2009

Despite losing an estimated US$25b in 2008, few people on or off Wall St have capitalised on this crisis as deftly as Warren Buffett

(NEW YORK) Warren E Buffett has two cardinal rules of investing. Rule No 1: Never lose money. Rule No 2: Never forget Rule No 1.

Well, a lot of old rules got trashed when the financial crisis struck - even for the Oracle of Omaha.

At 79, Buffett is coming off the worst year of his long, storied career. On paper, he personally lost an estimated US$25 billion in the financial panic of 2008, enough to cost him his title as the world's richest man. (His friend and sometime bridge partner, Bill Gates, holds that honour, according to Forbes.)

And yet, few people on or off Wall Street have capitalised on this crisis as deftly as Buffett. After counselling Washington to rescue the nation's financial industry and publicly urging Americans to buy stocks as the markets reeled, in he swooped.

Buffett positioned himself to profit from the market mayhem - as well as all those taxpayer-financed bailouts - and thus secure his legacy as one of the greatest investors of all time.

When so many others were running scared last autumn, Buffett invested billions in Goldman Sachs - and got a far better deal than Washington. He then staked billions more on General Electric.

While taxpayers never bailed out Buffett, they did bail out some of his stock picks. Goldman, American Express, Bank of America, Wells Fargo, US Bancorp - all of them got public bailouts that ultimately benefited private shareholders like Buffett.

If Buffett picked well - and, so far, it looks as if he did - his payoff could be enormous. But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter again.

After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Buffett is warning that the economy, though on the mend, remains deeply troubled.

'We are not out of problems yet,' Buffett said last week in an interview, in which he reflected on the lessons of the last 12 months.

'We have got to get the sputtering economy back so it is functioning as it should be.'

Still, Buffett hardly sounded shellshocked in the wake of what he once called the financial equivalent of Pearl Harbor. (An estimated net worth of US$37 billion would be a balm to anyone's psyche.)

'It has been an incredibly interesting period in the last year and a half. Just the drama,' Buffett said. 'Watching the movie has been fun, and occasionally participating has been fun too, though not in what it has done to people's lives.'

Investors big and small hang on Buffett's pronouncements, and with good reason: if you had invested US$1,000 in the stock of Berkshire in 1965, you would have amassed millions of dollars by 2007.

Despite that formidable record, the financial crisis dealt him a stinging blow. While he has not changed his value-oriented approach to investing - he says he likes to buy quality merchandise, whether socks or stocks, at bargain prices - Buffettologists wonder what will define the final chapters of his celebrated career.

In doubt, too, is the future of a post-Buffett Berkshire. The sprawling company, whose primary business is insurance, lost about a fifth of its market value during the last year, roughly as much as the broader stock market.

While Berkshire remains a corporate bastion, it lost US$1.53 billion during the first quarter, then its top-flight credit rating. It returned to profit during Q2.

Time is short. While he has no immediate plans to retire, Buffett is believed to be grooming several possible successors, notably David L Sokol, chairman of MidAmerican Energy Holdings at Berkshire and also chairman of NetJets, the private jet company owned by Berkshire.

After searching in vain for good investments during the bull market years, Buffett used last year's rout to make investments that could sow the seeds of future profits.

Justin Fuller, author of the blog Buffettologist and a partner at Midway Capital Research and Management, said the events of the last year, while painful for many, provided Buffett with the opportunity he had been waiting for.

'He put a ton of capital to work,' Fuller said. 'The crisis gave him the ability to put one last and lasting impression on Berkshire Hathaway.'

For the moment, Buffett seems to be retrenching a bit. Like so many people, he was blindsided by the blowup in the housing market and the recession that followed, which hammered his holdings of financial and consumer-related companies.

He readily concedes he made his share of mistakes. Among his blunders: investing in an energy company around the time oil prices peaked, and in two Irish banks even as that country's financial system trembled.

Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of Q2, according to Bloomberg News.

Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.

Among the stocks Buffett has been selling lately is Moody's, the granddaddy of the much-maligned credit ratings industry. Berkshire, Moody's largest shareholder, said last week that it had reduced its stake by 2 per cent\. \-- NYT

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