As shares of Berhshire Hathaway Inc. (NYSE: BRK.A, BRK.B) plunged over the past year, it became fashionable to ask whether or not Warren Buffett had lost his touch.
(See: ETF Guide: Down $16 Billion - Has Warren Buffett Lost His Touch?; MSN Money: The problem with Warren Buffett; Forbes: Has Buffett Lost His Touch; Reuters: Is Warren Buffett losing his touch?)
In June, financial advisor and CNBC contributor Dennis Gartman even called Buffett "an idiot."
But now that Berkshire has rallied more than 35% from its March lows, the only idiots to be found are those that ever doubted the world's second-richest man's business savvy. Indeed, many of the moves Buffett made during last year's market melee are paying off in a big way.
Take, for instance, his $5 billion investment in Goldman Sachs Group Inc. (NYSE: GS). Berkshire last September agreed to buy $5 billion in perpetual preferred Goldman shares that pay 10% interest. In addition, Berkshire received warrants giving it the right to buy $5 billion worth of Goldman's common shares at any time over the next five years at a price of $115 per share.
Critics lampooned that deal when shares of Goldman Sachs fell to a 52-week low of $47.41 in November. Since then, however, Goldman's stock has rocketed more than 240% to close yesterday (Tuesday) at $160.25.
If Berkshire cashed in it's warrants today, it would make a 40% profit or about $2 billion. But Warren Buffett has always been a long-term investor, which makes that highly unlikely.
"We will hold the warrants," Buffett said on Fox Business Network. "Every instinct in my body tells me that we will want to hold those warrants until they're very close to their expiration date. The preferred pays us the dividend and the warrants are going to make us the money."
While Berkshire waits, the $5 billion in preferred Goldman shares pay an annual interest of $800 million in dividends.
Berkshire's total stake in Goldman is now worth more than $9 billion - $4 billion more than the company paid for it - according to University of Louisiana finance professor Linus Wilson.
Berkshire's investment in BYD Co. Ltd., a Chinese producer of both cars and specialized batteries, has also paid off. Berkshire's MidAmerican Energy Holdings Co. agreed last Sept. 26 - just three days after the Goldman deal was announced - pay roughly $230 million for a 9.89% stake in BYD. MidAmerican bought 225 million shares of BYD at a HK$8 a piece. Those shares have since risen 430% to close yesterday at HK$42.40, handing Buffett a paper profit of about $1 billion.
Berkshire reported second-quarter profit of $3.3 billion, up from $2.88 billion a year earlier. The boost was largely attributable to derivative gains, which soared to $2.36 billion from $689 million the year prior.
Berkshire's book value rose 11.4% in the second quarter, to $73,806 a share, and Barron's estimates that it already could have increased since to around $79,000 now.
What Buffett's Buying
So if Buffett's supposedly cold hand has suddenly turned hot, how can investors benefit? Simple: By following the leader.
A 2007 study by two university professors titled "Imitation is the Sincerest Form of Flattery" showed that buying what Buffett has bought - even a month after his purchases - is a pathway to superior returns.
"The market ... appears to under-react to the news of a Berkshire stock investment since a hypothetical portfolio that mimics Berkshire's investments created the month after they are publicly disclosed earns positive abnormal returns of 14.26% per year," the study said.
And according to a regulatory filing disclosed Aug. 14, Berkshire is reading the tealeaves on healthcare reform. As of June 30, the company had loaded up 1.2 million shares of Becton Dickinson & Co. (NYSE: BDX), a maker of such medical equipment as scalpels, catheters and syringes, while winding down its positions in healthcare insurers. Berkshire cut its holdings in WellPoint Inc. (NYSE: WLP) by 27% to 3.5 million shares and sold 3.4 million shares, or 24%, of its UnitedHealth Group Inc. (NYSE: UNH) stock.
"If the government is going to open health care to more people, demand for health care supplies would increase," Gerald Martin, a finance professor at American University's Kogod School of Business told Bloomberg. "The plan that's going through Congress could be a real negative to the health insurers, but the people who provide the supplies could really benefit."
Berkshire also increased its holdings in Johnson & Johnson (NYSE: JNJ), the world's largest maker of health-care products, by 14% to 36.9 million shares. The purchase of J&J shares marks the second straight increase in the size of Berkshire's stake, according to Bloomberg.
All of the biggest holdings listed in Berkshire's filing gained in value in the second quarter. American Express Co. (NYSE: AXP) rose 71% in the period, Wells Fargo & Co. (NYSE: WFC) rose 70%, and Burlington Northern Santa Fe Corp. (NYSE: BNI) jumped 22%. Berkshire's single largest holding, The Coca-Cola Co. (NYSE: KO), rose 9.2% in the three months ended June 30.
Related News and Story Links:
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Money Morning:
Buffett Bargain Hunting Despite 2008 Losses
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Money Morning:
Berkshire Likely to Bounce Back After S&P Downgrade
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Barron's:
Berkshire Hathaway Book Value Rises
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MSNBC:
Buffett: I'm keeping my Goldman Sachs warrants