Buffett's Timing Goes Awry on Berkshire's Bet Against Dollar
Aug. 4 (Bloomberg) -- Billionaire investor Warren Buffett, stung by $955 million in losses from foreign-currency investments in 2005, slashed his bet against the U.S. dollar this year, just before its steepest decline in 18 months.
Berkshire Hathaway Inc., his Omaha, Nebraska-based insurance and investment firm, had $5.4 billion in foreign-currency forward contracts at the end of March, down from as much as $21.8 billion in 2005, according to the company's earnings statements. The U.S. Dollar Index, used to measure its value against six major currencies, fell 5.1 percent in the second quarter.
``It was the wrong timing,'' said Samarjit Shankar, director of foreign-exchange global strategy at Boston-based Mellon Financial Corp., which has $807 billion of managed assets. ``Even as shrewd an investor as Buffett can miss the timing sometimes.''
Buffett, 75, dubbed the world's greatest investor by biographer Robert Hagstrom, told investors in his annual report in March that he cut the contracts in favor of a new hedge against a declining dollar -- buying interests in companies outside the U.S.
The $4 billion purchase of an 80 percent stake in Israeli toolmaker Iscar Metalworking Cos., Buffett's first international acquisition, raises separate concerns as Hezbollah fighters launch rockets within range of the company's plant in Tefen, about six miles from Lebanon's border.
``With the fighting, there's uncertainty,'' said Donald Thorpe, an insurance analyst at Fitch Ratings in Chicago. ``Those assets are more at risk now.''
Second-Quarter Earnings
Berkshire may update investors on the currency position, including any gains or losses from forward contracts, when it releases second-quarter results later today. Forwards are agreements to purchase foreign currencies on a future date at a preset price.
Excluding gains or losses on currencies and sales of investments, Berkshire's second-quarter earnings probably rose 3.1 percent to $1.66 billion, or $1,077 a share, estimates Charles Gates, an analyst at Credit Suisse Group in New York.
Profits from non-insurance units, including utilities and manufactured housing, probably rose 7.2 percent to $725 million, while earnings from insurance, including Geico Corp. and General Re Corp., fell less than 1 percent to $954 million, Gates said. It will be the first full quarter that incorporates results from PacifiCorp, a Portland, Oregon-based power company acquired on March 21 for $5.1 billion in cash.
The company's stock advanced 3 percent this year, beating the 2.6 percent gain of the Standard & Poor's 500 Index and the 4 percent decline of the KBW Insurance Index. Berkshire's Class A shares fell $200 to $91,300 in New York Stock Exchange composite trading yesterday.
Plant Closing
Iscar, purchased by Berkshire on July 5, won't be included in the second-quarter's results. The company closed its Tefen plant last month and planned to have employees work nights and weekends to avoid delays in deliveries, Iscar Chairman Eitan Wertheimer said in a July 18 interview.
``We will supply to our customers on time,'' Wertheimer said Aug. 1. He declined to say whether the plant had reopened. ``Iscar is a multinational company with factories and inventory all over the world,'' he said.
Buffett, Berkshire's chairman and chief executive officer, acquired assets he deemed undervalued and held onto them for years, transforming a failing textile manufacturer into a holding company with a market value of $140.7 billion. Iscar, a maker of metal-cutting tools for aerospace and automotive companies, is one of dozens of takeovers in industries ranging from insurance and utilities to underwear and candy.
`America's Long-Term Problem'
Predicting the U.S. current account deficit would hurt the nation's currency, Buffett began using forwards as a bet against the dollar in 2002.
In the first three years, as the contracts' market value increased, Berkshire recorded $2.96 billion in gains. Last year, the U.S. Dollar Index rose 13 percent. The index measures the dollar against the euro, yen, Swiss franc, British pound, Canadian dollar and Swedish Krona.
``My views on America's long-term problem in respect to trade imbalances, which I have laid out in previous reports, remain unchanged,'' Buffett said in his annual letter to shareholders in March. ``My conviction, however, cost Berkshire $955 million pretax in 2005.''
Buffett, who didn't respond to requests for comment, told investors he scaled back his holdings of foreign currencies as U.S. interest rates rose relative to the rest of the world. Unlike changes in the value of stock or bond holdings, accounting rules require that fluctuations in currencies and derivatives be reflected in a company's earnings.
Stock Market Bet
``We don't know until well after the fact whether he's right or wrong,'' said Frank Betz, a partner at Warren, New Jersey- based Carret Zane Capital Management LLC, referring to Buffett's investment decisions. ``Most of the time, he's right. Sometimes he gets a little egg on his face, and he comes out all apologetic.''
A newer bet involving the performance of the stock market may trim Berkshire's second-quarter earnings, Betz said.
Last year Berkshire sold ``long-duration equity index put contracts'' to buyers eager to protect themselves should major stock indexes drop over the next 15 to 20 years. Its ``maximum exposure'' was about $14 billion at year's end, the company said in a regulatory filing in March.
``The markets went down in the second quarter,'' said Betz, who manages $100 million, including Berkshire shares. ``But I would be surprised if the losses were more than a pimple.''
In June, Buffett changed his plan for his own stock holdings, saying he would begin donating his Berkshire shares to charity now, rather than upon his death. Over time, he will give 85 percent of his stock to the Bill & Melinda Gates Foundation and four family charities, he said. The stake was valued at about $37 billion at the time of the announcement.
To contact the reporter on this story:
George Stein in New York at
Last Updated: August 4, 2006 00:09 EDT
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