How To Beat Buffett at His Own Game

Electricité de France (ECIFF.PK) made another attempt to purchase Constellation Energy Group (NYSE: CEG). EDF’s new offer of $52 a share for half of the company is almost as much as MidAmerican Energy, Warren Buffett’s subsidiary of Berkshire Hathaway (NYSE: BRK.A), paid for the entire company in September.

His $4.7 billion deal for Constellation - about what it cost to build one nuclear reactor - bought him three nuclear plants and 75 power-generating units. CEG jumped 12% on the news.

Buffett has been on a buying spree of U.S. equities over the past few months. And he even wrote an op-ed for the New York Times to support why. But before this, CEG was trading below his purchase price. And it’s not the only one.

A $3 billion investment in General Electric (NYSE: GE) got Buffett warrants to buy GE common stock for $24.50. It sells today for $17.23.

In September, he purchased Goldman Sachs (NYSE: GS) for $115 a share. GS is trading around $68 - a 40% discount.

In addition to receiving a 10% return on his $300 million investment in USG Corporation (NYSE: USG), Buffett’s notes are convertible into common stock at $11.40 a share. USG is trading at $8.79.

Flagship Berkshire Hathaway also has some issues. Last quarter’s profit dropped 77% and its shares reflect that. And just last month, its stock plunged to $74,100, a level not seen since October of 2003.

If history is any indicator of his future success, we won’t be betting against the “Oracle from Omaha” anytime soon. In fact, by picking up a few of these shares, you can say you got a better deal than he did.

Disclosure: None

Comments

[DollarTalkNet:]

Ouch! Those numbers hurt, but are indicative of the market in recent months. Unless you guessed 100% cash sometime before September, then you've probably been hurt some like Mr. Buffet. So, is now the time to pick up those cheap shares of BRK? That's the real question.

2008 Dec 04 03:20 AM

[Swiss Investor:]

BRK didn't buy GS at 115. It merely got warrants with that strike price along with its preferred shares investment in the company - for free.

2008 Dec 04 09:10 AM

[Vox Rationalis:]

Ummm...

"EDF’s new offer of $52 a share for half of the company is almost as much as... Berkshire Hathaway (NYSE: BRK.A), paid for the entire company in September."

Of course, BRK didn't actually buy the company in September, it entered into an agreement to purchase it. The deal's schedule has it closing in 09Q2.

"His $4.7 billion deal for Constellation - about what it cost to build one nuclear reactor - bought him three nuclear plants and 75 power-generating units. CEG jumped 12% on the news."

Confusing. Which news? Your structure makes it appear that CEG shares increase on the news that BRK was paying $4.7B for CEG.

"Buffett has been on a buying spree of U.S. equities over the past few months. And he even wrote an op-ed for the New York Times to support why."

You're confusing things. Buffett wrote that he's buying equities for his personal account, which is completely separate from BRK's recent purchases.

"But before this, CEG was trading below his purchase price. And it’s not the only one."

Before what? This piece desperately needs an editor.

"A $3 billion investment in General Electric (NYSE: GE) got Buffett warrants to buy GE common stock for $24.50. It sells today for $17.23."

Uh, yeah, it also got BRK $300M in annual dividend payments until GE decides to buy back the investment at a 10% premium.

"In September, he purchased Goldman Sachs (NYSE: GS) for $115 a share. GS is trading around $68 - a 40% discount."

Buffett may indeed have purchased GS at $115 for his personal account, but that's not what you're talking about (editing, please). You're talking about BRK's investment, which was a $5B preferred investment that will yield $500M in annual dividends until GS decides to repurchase it - at a 10% premium. This is entirely unrelated to the common share price.

The warrants that BRK got in each of these deals are there so that BRK can share in any long-term gains in the common stock. So far, they're worthless. Which means that BRK's investment is only worth 10% more than he paid for it, plus 10% annually.

"In addition to receiving a 10% return on his $300 million investment in USG Corporation (NYSE: USG), Buffett’s notes are convertible into common stock at $11.40 a share. USG is trading at $8.79."

Again, where's the problem? BRK's investments are based on a long-term thesis. In the meantime, it collects a healthy dividend. Let me ask you something. If you could buy an untraded preferred share of GE or GS that yields 10%, has a 10% redemption premium, AND gives you options at twice the current common share price, would you do it?

"Flagship Berkshire Hathaway also has some issues. Last quarter’s profit dropped 77% and its shares reflect that. And just last month, its stock plunged to $74,100, a level not seen since October of 2003."

Oh geez, will you please look just a LITTLE past the headlines, please? Did you happen to see BRK's operating profit? Down 19.2%, due in large part to outsized hurricane-related claims. The rest was due to mark-to-market rules and the drop in value of the long-term derivatives BRK sold against four market indexes.

And that plunge to $74,100? Did you note that at the close the next day, the stock had gained 21% from that low? Which do you think this is indicative of, a problem at BRK or a problem in the market?

"...by picking up a few of these shares, you can say you got a better deal than he did."

Um, which shares are you talking about? You mentioned four companies here: GS, GE, CEG, and BRK. The GS and GE preferred shares are not available to be picked up. CEG is trading at 27 and change, and BRK, aside from being a major shareholder, also has a deal with a pretty punitive cancellation clause, so it'll profit nicely if the deal falls through.

This was a very weak effort, U.

2008 Dec 04 03:53 PM