Buffett Bargain Hunting Despite 2008 Losses

By Jason Simpkins
Managing Editor
Money Morning

Famed investor Warren Buffett didn't fare much better than anybody else in 2008. But the Oracle of Omaha remains optimistic, convinced that investors who brave today's fierce financial tempest will be rewarded in the long run.

"I've been buying American stocks," Buffett said in an editorial in The New York Times. "This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds... If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities."

As the world's richest man, Buffett offers a kind of comfort that few others can.  And it couldn't come at a better time. The fourth quarter of 2008 was the worst quarter for the Standard & Poor's 500 Index in more than two decades, as the closely watched stock-market benchmark tumbled 23%.

It's likely that even Buffett took the same bath as the average investor.

In separate filings with the U.S. Securities and Exchange Commission (SEC), Buffett's Berkshire Hathaway Inc. (BRK.A, BRK B) said it spent $9.45 billion on equity securities in the first nine months of last year, Bloomberg News reported. Among the purchases:

  • Berkshire bought a majority stake in U.S. Bancorp (USB) over a period of time that never saw the bank's share price drop below 29.09, according to Bloomberg News. That stock is currently trading at less than $15 a share.
  • Berkshire increased its Ingersoll-Rand Co. (IR) stake six-fold last year when the shares never fell below $36.54. That company's stock has lost about half its value since Buffett made those purchases.
  • And Berkshire stocked up on shares of Eaton Corp. (ETN) between July and September  - a stretch in which the stock never fell below $52.32.  Eaton closed yesterday (Wednesday) at $44.36 a share.

With such ill-timed purchases, some analysts are beginning to think that "Warren" has lost his touch.

"People like to second guess Warren Buffett, but it's not just a flip question to ask if he should have kept his powder dry a bit longer," Jeff Matthews, author of "Pilgrimage to Warren Buffett's Omaha" and founder of Ram Partners LP, told Bloomberg. "He's paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger."

But, as a long term investor who has said that his favorite time to hold a stock is "forever," Buffett sees things differently.

"Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now," said Buffett.  "What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."

To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.

In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.

What Warren's Buying

In addition to taking healthy stakes in U.S. Bancorp, Ingersoll-Rand, and Eaton, Buffett also committed $4.7 billion to Constellation Energy Group Inc. (CEG), $5 billion to Goldman Sachs Group Inc. (GS), and $3 billion to General Electric Co. (GE) last fall.

Buffett has also spent the past few years stocking up on railroad stocks, especially Burlington Northern Santa Fe Corp. (BNI). Berkshire's most recent purchase of 2.6 million shares took its stake to more than 76 million shares - in excess of 20% - of the nation's second-largest railroad.

And last week, Berkshire threw in a few surprises.

After buying 3% of Swiss Re (OTC: SWCEY) in January 2008, Berkshire last week poured another $2.6 billion into the world's second-largest reinsurance company. Swiss Re has lost about three-quarters of its market value since Buffett's original investment - further evidence that the investing icon remains undaunted by his losses.

Berkshire agreed to buy $300 million of corporate debt issued by motorcycle icon Harley Davidson Inc. (HOG). The senior unsecured notes purchased by Berkshire offer a 15% annual interest payment, making it one of Buffett's many recent fixed-income investments.

Buffett agreed to buy $300 million of debt from USG Corp. (USG) in November, and his preferred shares of Goldman Sachs offer a 10% yield. The $2.6 billion he put into Swiss Re was accompanied by a 12% yield.

"He's got cash coming in faster than most people would have a ready place to put it," Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares, told Bloomberg. "This economy is certainly providing him with opportunities."

With about $30 billion in cash on hand at Berkshire Hathaway, analysts are wondering where Warren's going to strike next.

There is some speculation that if Berkshire shares continue to slide, Buffett could order a share buyback.

In the past, Buffett has said a company must meet two conditions to warrant buybacks of its stock: "First the company has available funds - cash plus sensible borrowing capacity - beyond the near-term needs of the business and, second, finds its stock selling below its intrinsic value, conservatively calculated," he said.

Shares of Berkshire are down 37% in the past year and there's little doubt that Buffett has the money.

Of course, Buffett also said last month in an interview with PBS that he would notify shareholders of his intentions before engaging in a buyback program.

"If I ever name a number, I'll name it publicly," Buffett said. "I mean, if we ever get to the point where we're contemplating doing it, I would make a public announcement."

The last time Buffett made such an announcement was nine years ago.

Another possibility is that Berkshire will invest in energy companies with large holdings in oil sands - notably Calgary-based Nexen Inc. (NXY).

Buffett, along with Microsoft Corp. (MSFT) mogul Bill Gates visited the Athabasca Oil Sands region in northeastern Alberta last August.

"The world will be using more oil 15 or 20 years from now," Buffett told the Financial Post in an interview. "We are on a course that cannot be changed. It would surprise me if the world doesn't want to use 100 million barrels a day in 15 or 20 years."

"You need some ... elephant fields [of oil to meet looming demand] and we haven't found any elephant fields in the last 15 or 20 years," he added. "So the sands are huge."

However, some analysts remain skeptical.

"Seems there is a rumor that Berkshire is interested in Nexen - no one can give me comfort that this is indeed the case - they haven't bought into [exploration and production] names before ... but stranger things have happened," investment bank Scotia Capital wrote in a note to clients.

What Buffett will do next remains unclear, but there is one certainty: He won't be sitting on the sidelines and hoarding cash.

"Today, people who hold cash equivalents feel comfortable. They shouldn't," Buffett wrote back in October. "They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value," Buffett said in October.

"Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: 'I skate to where the puck is going to be, not to where it has been'."

Related News and Story Links:

  • Financial Post:
    Will Warren buffett take a stake in Nexen?