II asks if Buffett's a has been?
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TAUB TALK: Is Buffett Washed Up?
individualinvestor.com
by Steve Taub 10/1/99
Has Warren Buffett lost his touch?
Has the Oracle of Omaha become the Has Been of Wall
Street?
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On the face of it, it would be hard to argue otherwise.
For one thing, on Thursday the 'A' shares of Berkshire
Hathaway (NYSE: BRK/A) - Quotes, News, Boards)
touched a new 52-week low, closing at $55000, down from a
high of $81100. The 'B' shares (NYSE: BRK/B - Quotes,
News, Boards) closed at $1856, down from $2713 and just
above their 52-week low of $1840.
Why?
Let me count the ways.
First of all, a number of his high-profile investments are
losing their fizz, such as Coca-Cola (NYSE: KO - Quotes,
News, Boards), which closed at $48.25, a new 52-week low
of its own, and down from about $75.50. Gillette (NYSE: G -
Quotes, News, Boards) is now down below $34, just above
its 52-week low and way down from $64.38. Walt Disney
(NYSE: DIS - Quotes, News, Boards) closed at $26, down
from its 52-week high of $38.69.
Meanwhile, General Re, the huge reinsurer which Berkshire
bought last year, continues to rack up large underwriting
losses. And it didn't even have huge exposure to Hurricane
Floyd.
Yikes!
Another reason why people think Buffett is washed up: His
refusal to embrace the technology revolution on Wall Street.
Imagine how smart he would have looked if he had bought
the tech versions of Coke, Gillette, American Express
(NYSE: AXP - Quotes, News, Boards) and Freddie Mac
(NYSE: FRE - Quotes, News, Boards).
The tech franchises. Like, say, Microsoft (NASDAQ: MSFT -
Quotes, News, Boards), Intel (NASDAQ: INTC - Quotes,
News, Boards) or maybe Cisco (NASDAQ: CSCO -
Quotes, News, Boards).
But, noooooo, as John Belushi would have said.
He had to shun tech with an air of smugness, wearing his
tech ignorance like a badge of honor, in the words of my
colleague Greg Bartalos.
However, before you write off Warren, consider that this
year's selloff is not as unusual as you might think.
For one thing, over the past 20 years, Berkshire's stock has
lagged the S&P 500 five times. That's 25% of the time for all
of you without calculators.
In 1996 it trailed the market by 17 percentage points while in
1990 it lagged by 20 percentage points, points out Robert
Hagstrom, portfolio manager for the Legg Mason focus Trust.
He's also the guy who wrote the book The Warren Buffett
Way.
'I don't think he has turned incapable of making investment
decisions,' Hagstrom insists. 'Either what is happening is
permanent or transient. I see nothing that tells me it's a
permanent state of affairs.'
In fact, he says not all shareholders are unhappy. Hagstrom
figures that about 30% of Berkshire investors came in over
the past two years. So, they have either lost money or
broken even at best. These people are clearly agitated.
However, there is a whole group of people who have been
Buffett believers for years and they are actually heavily
buying these days. They include Bill Ruane's Sequoia Fund,
First Manhattan and Hagstrom himself.
In fact, Berkshire is his fund's largest holding, with 15% of
total assets. He'd love to buy more but he can't since his
fund bylaws will only permit him to exceed the 15% level if
no other position exceeds 5%. However, Hagstrom has 10%
stakes in Citigroup (NYSE: C - Quotes, News, Boards),
American Express (NYSE: AXP - Quotes, News, Boards)
and Freddie Mac (NYSE: FRE - Quotes, News, Boards).
'We are buying (up to 15%) in all of our new (private)
accounts,' he notes.
Why is he still such a believer? For one thing, he knows that
96% of the change in stock price of Berkshire is explained
by the changes in the investments it holds. 'Are Coke,
Gillette (and his other holdings) permanently harmed? I'm
not in that camp,' he insists.
Rather, investors have been repricing the businesses based
on their current expected returns. So, new Berkshire
holders, in effect get into Coke, Gillette and Freddie Mac, for
example, at the new marked down prices.
'I'll bet Coke, Gillette, American Express and Freddie Mac
do better than the S&P over the next five years,' Hagstrom
boldly challenges.
Then there's General Re, the huge reinsurer, which
Berkshire bought in 1998. This has been a disaster. It
suffered 'significant' underwriting losses in the first two
quarters and figures to rack up another underwriting loss in
the third quarter.
However, Hagstrom thinks it should turn a profit by the first
quarter of 2000. Why the confidence? It's doing a better job
of pricing policies. In fact, when the pricing environment is
very tight, Buffett is known to just stop writing new policies.
Now, here's the beauty about Buffett's insurance operation. If
he has excess capital and doesn't want to write new
policies, he can simply upstream the capital into
non-insurance businesses.
And keep in mind that he has $15 billion in cash to play
with. Buffett has said publicly that he'd love to spend this
kind of money on another acquisition.
Meanwhile, Berkshire trades at just 1.4 times book value.
Insists Hagstrom: 'This is one of the cheapest prices in
the past 10 years.' |
