Look, Barron’s can say what they want (see summary) about Warren Buffett and his company Berkshire Hathaway (NYSE:BRK.A), but I have just one thing to say here: Berky is the ultimate anti-volatility asset. When the hurricanes hit in 2005, I told my boss that the easy money, low-risk, low-reward play was to buy Berky. My boss liked to take risks, so that idea was shelved. Too bad, it was easy money. After all, who could write retrocessional coverage (Reinsuring reinsurers) except Berky? Every other writer was broke or disabled…
Now we have a different type of hurricane. Prior bad lending practices are destroying lending/insurance capacity in mortgages and elsewhere. This could be an investment opportunity for Berky. Thing is, outside of the Sovereign Wealth Funds, Berky has one of the biggest cash hoards around, and during times of panic, where assets get sold at a discount, cash is valuable.
So during times of panic, we should expect Berky’s valuation to expand. This is one of those times.
One final note: Suppose Buffett, much as he doesn’t want to be an asset manager, decides to take Ambac (ABK) private. How would he do it? Think of what he has done in other cases: he creates a nonguaranteed downstream holding company, capitalizes it to a level necessary for a AAA rating, and buys Ambac. Warren never guarantees the debt of subsidiaries that he buys. Why should he reward bondholders of his target companies? Isn’t it enough that he pays the debts?
Well, yes, sort of. Warren has never sent a subsidiary into insolvency, but he clearly reserves the right to do that. Bondholders have given him that right, and I would not blame him for using that right under extreme circumstances.
That said, Berky’s excess cash offers opportunities at present, because Buffett can use that cash to snap up distressed assets when he chooses to do so, and at minimal risk to Berky if an acquisition fails.