Even Warren Buffett, the “Oracle of Omaha”, is capable of making mistakes in this down market. It appears that after displaying resiliency last year, Berkshire Hathaway may be in for a rough year. Buffett and his company, Berkshire Hathaway (BRK.A), haven’t been able to avoid the credit problems that most of the financial industry has already encountered. Berkshire is down over 40% from its 52 week high, and has lost $11.6 billion in net worth. After losing 9.6% in share book value it’s now questionable whether this blue chip company can keep its luster and demonstrate the strength and leadership that it has shown for decades.
This past month, credit issues have been the biggest concern for Berkshire Hathaway. Earlier in March, its rating was reduced by Fitch from AAA to AA+, and its senior unsecured debt rating lowered to AA from AAA. Fitch cited a negative outlook and a need for capital in the future. Standard and Poor’s has also reconsidered its rating of Berkshire, downgrading its outlook to negative. However, Standard and Poor’s did affirm Berkshire’s rating of AAA, but will continue monitoring the company giving them approximately one year to raise capital in order to ensure stability.
I feel that Berkshire is solid from a credit perspective, since Fitch also states that no company in the financial sector should have a AAA rating. This appears unfair and has had a negative impact on the stock value of Berkshire. Additional reason for concern is that the price for Berkshire credit swaps has increased significantly. These swaps are essentially insurance on Berkshires liabilities, and the rise in price emphasizes a need for Berkshire to stabilize its finances. High swap prices insinuate a higher possibility of Berkshire defaulting on its debt obligations.
In response to credit issues, Berkshire Finance sold $750 million in three year notes that will yield 282 basis points above the treasury rate. This sale was originally meant to be for $400 million, but Berkshire decided to increase the transaction this past Thursday. Buffett also recently announced that some of his company’s financial troubles pertain to the rising price of capital, since others choose to take billions in bailouts while he chooses to remain independent. This should allow Berkshire a faster rebound than its competitors and also allows them to stay clear of all the stipulations tied with Federal aid.
The greatest investor of our time has made a few mistakes himself. These small mistakes by the tycoon have cost his prestigious company billions. He admits to foolishly upping his investment in ConocoPhillips (COP) stock when oil and gas prices were at their highest in 2008. This mistake cost equity holders several billion dollars in value. He also made a smaller blunder that cost him $217 million when he bought vast amounts of stock in two Irish banks, which where revalued at roughly $27 million on his books.
The outcome of Buffett’s $5 billion investment in Goldman Sachs' (GS) is yet to be seen. At first glance, it appeared to be a bad decision, as Goldman dropped to $52 a share, deeming the ability to strike at $115 useless. However, the stock has rebounded very well and it appears that this will be a smart long term play. The warrants do not expire until 2013, so there is still ample time to allow Goldman Sachs' to rise even further in price. The 10% dividend on these preferred shares is a bonus that could help Berkshire solidify these shares in the future.
Warren Buffett didn’t earn his nickname, the “Oracle of Omaha”, for no reason. While he has made some blatant mistakes in the past year, they shouldn’t affect his company in the long run. His current objective is to secure capital at a competitive rate compared to those who are receiving aid from our government. While its credit rating has been questioned, Berkshire Hathaway should have the time and certainly the leadership to pull through and demonstrate why it has averaged 20% returns for the last 44 years. The economic recession has proven to be deep, leaving even the premier investors and seemingly most stable companies vulnerable.
Disclosure: The mutual fund the author is associated with is Long GS