Is Buffett Backing Away from Stocks? 23 comments
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The headline on this New York Times piece may be a bit oversold, but it would appear that Berkshire Hathaway (BRK.A) and Warren Buffett are taking a cautious approach to investing in equities now. In fact, fixed income seems to be getting quite a bit of attention from them right now, along with selected stocks. Also, I imagine he is doing some pruning now that many holdings have bounced back from their lows [emphasis added]:
Closely Watched Buffett Recalculating His Bets (New York Times, September 7, 2009, Graham Bowley)
…When so many others were running scared last autumn, Mr. Buffett invested billions in Goldman Sachs (GS) — and got a far better deal than Washington. He then staked billions more on General Electric (GE). While taxpayers never bailed out Mr. Buffett, they did bail out some of his stock picks. Goldman, American Express (AXP), Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB) — all of them got public bailouts that ultimately benefited private shareholders like Mr. Buffett.
Buffett Beats Out U.S. Treasury on Goldman Deal
I wrote last Fall that the way to bail out the banks was not to have the U.S. Treasury invest directly. Instead, a better plan would have been for the Treasury to create a structured investment with Warren Buffett or Bill Gross or both in charge of structuring the deal.
In this approach, the government would give private investors a significant tax break on any capital invested in approved banks. Then, the government would step aside and let private investors put in capital as they see fit. In this scenario, investors would have gotten a good deal, banks would have gotten the capital they need and the U.S. Treasury would not have been on the hook for anything.
To see why this would have been better, here is a comparison of how Buffett’s Goldman Sachs deal compares to the Treasury’s Goldman Sachs deal. This chart from Barry Ritholtz’s excellent blog illustrates the points made in a fascinating Bloomberg piece (see below):
Source: Barry Ritholtz
Stop the presses! Warren Buffett outsmarted the U.S. Treasury. Can you imagine that? This piece from Bloomberg gives the details on how poorly the U.S. Treasury fared in its bank investments versus Warren Buffett’s investment in Goldman Sachs [emphasis added]:
Paulson Bank Bailout in ‘Great Stress’ Misses Terms Buffett Won (Bloomberg, January 10, 2009, Mark Pittman)
Henry Paulson’s bank bailouts, done under “great stress” during the worst financial crisis since the Great Depression, failed to win for U.S. taxpayers what Warren Buffett received for his shareholders by investing in Goldman Sachs Group Inc.
The Treasury secretary made 174 purchases of banks’ preferred shares that include warrants to buy stock at a later date. While he invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, Paulson gained certificates worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts…
So, score one for Warren Buffett. Of course, it did not take a lot of intellectual firepower to figure out that Buffett would strike a better bargain than the hapless U.S. Treasury. After all, the Treasury is just a massive government agency with many billions to invest, not to mention having the power of the government behind it. And, Buffett is just a smart businessman.
The New York Times continues:
If Mr. 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 Mr. Buffett is warning that the economy, though on the mend, remains deeply troubled…
I’m not convinced that this piece is correct in that Buffett and Berkshire are seemingly making a market timing call, but rather I think they are repositioning the portfolio by jettisoning holdings in which they have lost confidence. The poster child for that would no doubt be Moody’s as the New York Times’ piece correctly deduces:
…Mr. 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.
Mr. 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 the second quarter, 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 Mr. 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 percent…
If I were a Moody’s shareholder, this would worry me a lot. The future for credit ratings agencies such as Moody’s is troubled indeed. But, despite problems with Moody’s, Berkshire had a ‘bang-up’ second quarter and I suspect the third quarter will be very good as well. Bloomberg reported early last month that Berkshire Hathaway had a blockbuster quarter [emphasis added]:
Berkshire May Post Blockbuster Result (Bloomberg, August 6, 2009, Erik Holm)
Berkshire Hathaway Inc., with a stock portfolio valued at more than $60 billion, may report its best quarter in at least two years using the metric preferred by the firm’s billionaire chairman, Warren Buffett….Berkshire’s book value per share, the measure highlighted by Buffett in the first sentence of his annual letter to shareholders, has declined in four of the past five quarters, and 2008 marked only the second time since Buffett took over in 1965 that it dropped for a full year.
In his “owner’s manual” for Berkshire shareholders, Buffett says he considers the figure to be an objective substitute for the best measure of the Omaha, Nebraska-based firm’s success: a metric he calls intrinsic value.
…”Intrinsic value is an estimate rather than a precise figure,” Buffett wrote in the manual on Berkshire’s Web site. “The percentage change in book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.”
The value of shares Berkshire reported holding as of March 31 increased 23 percent in the second quarter…
My general takeaway from this piece is that Buffett is repositioning the portfolio as I stated above. Second, I think there are excellent opportunities in government and corporate bonds and those are attractive enough to get some of Berkshire’s capital. That’s a no brainer. Lastly, I think Buffett is doing exactly what he says he does, ‘get greedy when others are fearful and fearful when others are greedy.’
Full Disclosure: Kurt Brouwer owns Berkshire Hathaway (BRK.B)
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Easy credit goosed the economy for a decade or two. Now it is relatively gone for now except the govt spending like drunks giving out money to derelicts at every chance. Once this free money scheme ends then what?
If there was ever a divergence, it was when Buffet bought the Conoco stock, last year. He almost never buys after a run up like that, and the only explanation I have is that he felt that oil prices were not going to fall much.
I also think the put he sold seems out of character, not so much because he sold a put, but that he sold a put on the general market performance. I think he did it because he got GREAT terms, and there has been no time in the last 100 years where he would have lost anything on his bet.
If there is anything that characterizes Buffet is his unwillingness to part with money. He sat on huge piles of cash a few years ago, and this while virtually all of Berkshire's businesses were generating huge amounts of cash. This was actually causing BRK to under perform as cash was yielding close to zero, after tax.
That he put money to work ,when everybody else was bailing out, is vintage Buffet, and I expect his bets to payoff significantly in the future. It is totally consistent with the concept of "margin of safety".
I also do not see him doing much as long as the market is fully valued. He is not a market timer, but he DOES make bets based on his perceived VALUE of the market (just like Ben Graham did).
That he ends up buying low and selling high makes it look like he is timing the market, when he is not, and he makes no prediction about what the market will do when he makes a decision to buy or sell.
Regarding the GS discussion, the author stated it best - Buffett is a businessman. The government is not bailing out financials so that it can make a profit. Any profit earned by the government is tertiary to its main goal - stabilizing the financial system.
This market reminds me of another casino related strategy for playing Poker, which answers the question "When is the best time to get up from the poker table?" The answer - "The best time to get up is when all the fish have run out of money." For context, the fish are inexperienced players which are likely to lose all their money.
This market is like one big poker table, and the fish is the US (and G-20) governments with their stimulus. As soon as that punch bowl gets taken away, the sharks (GS et al.) are going to take their profits off the table.
Honestly, does anyone truly believe that once the stimulus ends that the economy is not going back into the tank? I mean have we really resolved any of the problems that caused the crisis in the first place?
Good Luck all
However, I thought I would come to the defence of the Treasury as I think they have always acted (or at least tried to act) in good faith and to the interests of everyone they represent.
Although the investment returns were very different - Buffett and Hank Paulson has very different investment objectives when they were putting money towards GS. Buffett was a company looking for the highest return while the Treasury wanted to serve and protect the financial system and in that respect - I think they both completed their investment objectives!
On Sep 09 07:04 AM chap08 wrote:
> "excellent opportunities in government and corporate bonds"
>
> You've gotta be kidding. There are some good investments in corporate
> bonds, yes, but in general, this is not a good long term place to
> be. If Buffett is buying government debt, I would bet that he is
> only buying short term debt and he is only doing it because he needs
> a large liquid market to park some funds. If you want a clue as to
> his real thoughts on government debt, read between the lines of his
> recent published thoughts on inflation risks.
Either 1. Wait for things to fall more
or
2. buy high yielding distressed debt.
Incidentally if you are intersted in what books buffett recommends:
www.favaholic.com/peop...
I'll bet you he's not sitting around trying to pick the direction of any markets, though.
On Sep 09 07:04 AM chap08 wrote:
> "excellent opportunities in government and corporate bonds"
>
> You've gotta be kidding. There are some good investments in corporate
> bonds, yes, but in general, this is not a good long term place to
> be. If Buffett is buying government debt, I would bet that he is
> only buying short term debt and he is only doing it because he needs
> a large liquid market to park some funds. If you want a clue as to
> his real thoughts on government debt, read between the lines of his
> recent published thoughts on inflation risks.
On Sep 09 10:29 PM noblepaladin wrote:
> Buffett is not buying US Government bonds, he is buying foreign government
> bonds, which pays in a foreign currency, which is consistent with
> his stance on a weakening dollar.
"The Treasury secretary made 174 purchases of banks’ preferred shares that include warrants to buy stock at a later date. While he invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, Paulson gained certificates worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts…"
Who in his right mind believes that Paulson was working for the taxpayer? Of COURSE Buffett would have gotten a better deal if he used his own money. So would Paulson!
SOB.
SOB.
On Sep 09 10:55 AM Ricard wrote:
> Agree with most of the article and the conclusion.
>
> Regarding the GS discussion, the author stated it best - Buffett
> is a businessman. The government is not bailing out financials so
> that it can make a profit. Any profit earned by the government is
> tertiary to its main goal - stabilizing the financial system.
On Sep 09 10:27 AM OceanTiger wrote:
> Whether or not you can earn money from the stock market depends on
> what kind of method you are using. You may use charting methods to
> find buy or sell signals from others recommendation. Technical analysis
> are not always correct. The best way is buying value stocks and holding
> them until you get money. The reason is very simple: this method
> has been proved very effective by Peter Lynch and Warren Buffett.
> Trade4Rich.com
As one blogger noted, surely it would have been better to put together a consortium of private sector titans such as Pimpco, Berkshire, Blackrock, etc and perhaps provided government guaranteed funding (for a price) to "bailout", finance, and oversee the stabilization of the financial industry. Presumably with some timeline such as five years to turn around the troubled banks and earn some reasonable return for the consortium oversight and funding. Most if not all of the competitors probably would have then survived instead of becoming forced sales at firesale prices and without the hugh reduction in competition that has so benefited the favored few. No reason why AIG could not have been handled in a similar manner as well.
In fact such an approach, as a contingency risk regulator by a consortium of private sector titans who would fill the gap in future emergencies, seems to be a much more productive idea than having the Fed/Treasury/FDIC fill such a role. The major government agencies have exhibted significant shortfalls such as regulatory capture, nepotism with croony capitalists, conflicted lobby/special interest/alumni placements (Paulson &others), etc.
We cannot see any reason why the private sector cannot be responsible for saving themselves and thus have the larger financial sector responsible for managing and cleaning up their own self-inficted problems. The entire concept of "privatizing profits and socializing losses" is simply nonsense.
On Sep 09 10:55 AM Ricard wrote:
> Agree with most of the article and the conclusion.
>
> Regarding the GS discussion, the author stated it best - Buffett
> is a businessman. The government is not bailing out financials so
> that it can make a profit. Any profit earned by the government is
> tertiary to its main goal - stabilizing the financial system.