Buffett makes good bets, bad bets

[Kalyan]

Buffett makes good bets, bad bets

Warren Buffett may be the world's most famous investor, but even he doesn't get everything right.

Berkshire Hathaway Inc, the insurance company Buffett has run since 1965 and which is holding its annual meeting on Saturday in Omaha, Nebraska, owns close to 80 companies and invests in dozens of stocks.

It is sometimes said that an investor who gets six out of every 10 bets right will be among the top performers. That means even the best investors make mistakes. And while shareholders who have stuck with Buffett for the very long haul have been amply rewarded, the ride has not always been smooth.

Buffett is also a stickler for propriety when it comes to the ethics of making money. In 1991, after he was asked to become chairman of Salomon Inc to clean up a Treasury bidding scandal, Buffett testified before the US Congress: "Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless."

Buffett had bought $700 million of convertible preferred stock in Salomon four years earlier. The investment ultimately was not one of his best.

The following are a handful of Berkshire's investments over the years - the good, the bad and the unknown.



courtesy : reuters

source : economic times

[Kalyan]

THE GOOD

* In 1976, Berkshire began accumulating an equity stake in auto insurer Geico Corp, 24 years after selling an earlier stake for $15,259. It built that stake to 50 per cent and then at the beginning of 1996 paid $2.3 billion for the remainder.

The acquisition brought aboard Tony Nicely, who still runs Geico and whose leadership Buffett has lavishly praised, and Lou Simpson, whom Buffett has said would be an obvious candidate to replace him as Berkshire's chief investment officer but for the fact that he, too, is in his 70s. Geico has roughly tripled its US auto insurance market share since Berkshire bought the entire company, ending the year with 7.7 per cent and Buffett said January and February showed record growth in policyholders. The insurer generated about 12 per cent of Berkshire's revenue in 2008.

* In 1989, Berkshire bought $600 million of preferred stock in Gillette Co, the razor blade maker that had been hurt by the introduction of disposable razors. That investment had grown several-fold by the time Gillette was acquired in 2005 by Procter & Gamble Co. Berkshire still holds most of that stake; at year end, it held a 3.1 per cent stake worth $5.68 billion, but for which it had paid just $643 million. Even so, while Buffett in his 1995 shareholder letter characterized Gillette at the time as "our best holding," he also said he made his "biggest mistake" with the purchase, by opting to buy preferred stock rather than common stock.

* Berkshire owns 200 million Coca-Cola Co shares, an 8.6 per cent stake it had accumulated by 1994. The stake was worth $9.05 billion at year end, but Berkshire paid just $1.3 billion for it.




courtesy : reuters

source : economic times

[Kalyan]

THE BAD

* In 1993, Berkshire bought Dexter Shoe for $433 million in stock. Eight years later, it folded the struggling company into another business. In his 2007 shareholder letter, Buffett called Dexter Shoe "the worst deal that I've made."

* In 2008, Buffett amassed a large stake in oil company ConocoPhillips, not anticipating that oil prices would fall by about three-fourths from their record high near $150 a barrel. Berkshire spent $7.01 billion on Conoco shares, but these were worth just $4.4 billion at year end. Buffett said that, even if oil prices rise, "the terrible timing of my purchase has cost Berkshire several billion dollars."






courtesy : reuters

source : economic times

[Kalyan]

THE UNKNOWN

* Buffett has entered into 251 derivatives contracts, most of which are essentially bets on the long-term direction of stocks and junk bonds. He has said these contracts differ from other derivatives he has called "financial weapons of mass destruction" in part because of the billions of dollars of premiums he collects upfront from counterparties.

Berkshire has four major types of contracts:

-- Berkshire has equity index "put" options tied to where the Standard & Poor's 500, Britain's FTSE 100, Europe's Euro Stoxx 50 and Japan's Nikkei 225 trade between September 2019 and January 2028. At year end, Berkshire had a $10.02 billion paper liability on these contracts and said it could in theory owe $37.13 billion if the indexes all went to zero.

-- Berkshire has contracts tied to credit losses in higher-risk "junk" bonds between September 2009 and December 2013. At year end, Berkshire had a $3.03 billion paper liability on the contracts and said it could in theory owe up to $7.89 billion.

-- Berkshire wrote credit default swaps on $3.9 billion of contracts covering 42 companies. At year end, Berkshire had a $105 million liability.

-- Berkshire entered into tax-exempt bond insurance contracts structured as derivatives. At year end, Berkshire had a $958 million liability and $18.36 billion of potential losses. Buffett said "we feel good" about the underlying bonds, which are largely secured by states' taxing and borrowing power.







courtesy : reuters

source : economic times