Buying like Buffett beats investments in Berkshire

Written by Bloomberg | Updated: Jun 29 2009, 05:17am hrs
Ari Levy & Erik Holm

Warren Buffett followers who invest like the billionaire instead of with him would have earned higher returns since the bear market bottomed more than three months ago.

Berkshire Hathaway Inc's 18% advance since US equity indexes reached their lows on March 9 lags behind 16 of the company's top 20 stock holdings. A $1 million investment mimicking Berkshire's portfolio would have produced a $724,000 profit through Thursday, compared with a $184,600 gain for the same-sized investment in Berkshire shares. Buffett is chairman and head of investing at Omaha, Nebraska-based Berkshire.

Buffett, 78, has seen long-standing equity positions in Wells Fargo & Co and American Express Co more than double from their March lows after losing over half their value in the 12 months prior. Companies Berkshire owns outright, meanwhile, had declining sales amid the global recession, and the firm's losses from derivative positions on corporate and municipal debt may not reverse as quickly as those tied to stock markets.

His investments, because they're based on such fundamental quality and traditional values, are going to continue to do better than the rest of the market, said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which oversees $700 million and owns Berkshire shares. Critics were wrongly declaring that Buffett had lost his touch earlier this year, Betz said.

Berkshire's holdings

Berkshire is the top shareholder in Wells Fargo, the fourth-largest US bank by assets, and American Express, the biggest credit-card company by purchases. The company is the biggest owner of Goldman Sachs Group Inc., which has surged 95% since March 9, and the third-leading investor in US Bancorp, which has climbed 75%.

A rally in railroad stocks has also lifted Berkshire's investment portfolio. The company owns 23% of Burlington Northern Santa Fe Corp, which has gained 47% since March 9, and is among the top 10 holders of Union Pacific Corp shares, up 58%.

The decline in world stock markets at the start of the year contributed to Berkshire's worst loss in at least two decades in the first quarter. The company wrote down derivatives tied to corporate-debt indexes and took a charge on ConocoPhillips shares purchased when oil prices were near their peak.

Derivatives

Berkshire's liability on derivatives at its finance and financial products operations widened to $15.4 billion as of March 31, from $14.6 billion three months earlier. Some of those liabilities, on derivatives tied to four of the world's stock markets, may have reversed in the second quarter as the indexes recovered, said Whitney Tilson, managing director of T2 Partners LLC, a New York-based hedge fund that owns Berkshire shares.

Berkshire is cheaper today relative to its intrinsic value than it was on March 9, when its stock portfolio was in the tank and its index puts were marked to market, Tilson said. The intrinsic value of Berkshire, when you just factor in those two things, is easily up well over $10,000 a share and the stock really hasn't moved that much.

Buffett didn't respond to a request to comment on this story left with assistant Carrie Kizer.

Berkshire Class A shares fell $95 to $86,705 at 4 p.m. on the New York Stock Exchange. The gain since March 9 compares with a 36% advance in the Standard & Poor's 500 Index.

The so-called equity puts reduce Berkshire net income when markets fall. They don't represent cash paid out because the payments aren't required until 2019 or later.

Consumers wary

Buffett said earlier this year that the economic slump depressed revenue at Berkshire's jewelry businesses and operations related to real estate. Profit at its retail operations, a category that includes furniture and candy stores as well as jewelry, fell by half in the first quarter to $16 million before taxes, the seventh straight decline.

The change in the American consumer's behavior in the last six months is like nothing that's ever happened, Buffett, said in an interview with Bloomberg Television in March.

They won't go in our jewelry stores. They've got the money, but when Valentine's comes along, they think: 'I still love my wife, you know, but I'll just tell her this year.'

Berkshire last year cut jobs at units including Clayton Homes Inc., which builds manufactured housing, and brickmaker Acme Building Brands. The US unemployment rate in May climbed to 9.4%, the highest since 1983.

'Next shoe to drop'

Berkshire has a smaller number of derivatives tied to municipal bonds or debt issued by corporations. Berkshire, which collected $3.4 billion in premiums on the derivatives related to corporate debt as of the end of last year, paid $1.13 billion to buyers of the contracts this year through May 8.

The company may be forced to pay out more as state and local budget deficits lead public institutions to default, said Charles Ortel, managing director of New York-based Newport Value Partners, who advises clients to sell Berkshire shares short.

It's the next shoe to drop, Ortel said. We may find ourselves very quickly where not only are companies seeking bailouts but states and municipalities and school districts and other worthy entities are all clamoring for scarce capital.