Berkshire Hathaway Cut Citigroup Stake; Annual Letter Mum on Silver,
Bonds
Berkshire Hathaway Cut Its Citigroup Stake in 1998 (Update3)
(Adds Berkshire Hathaway stock performance vs. S&P 500 in
the 13th paragraph.)
Omaha, Nebraska, March 13 (Bloomberg) -- Billionaire
investor Warren Buffett cut his holdings in Citigroup, the
world's largest financial-services firm, according to his annual
letter to shareholders of Berkshire Hathaway Inc.
Buffett's letter, released this morning, also showed that he
bought shares of American Express Co. in 1998 and sold some of
his shares in Walt Disney Co., Freddie Mac and Wells Fargo & Co.
The world's second-richest man didn't say what he's done
with what he called last year his ''unconventional commitments''
-- investments in silver, oil and bonds.
''We have eliminated certain of the positions discussed last
year and added certain others,'' he wrote. Regulatory filings
last year showed Berkshire Hathaway sold $20 billion in zero-
coupon Treasury bonds.
Berkshire, an Omaha, Nebraska-based insurer and holding
company released its annual report, containing Buffett's letter
to shareholders, on its Web site, www.berkshirehathaway.com, at 8
a.m. New York time.
Silver, Oil
Berkshire said in February 1998 that the company had bought
129.7 million ounces of silver on a bet that demand would outpace
production, as it had for years, and send prices higher. Since
then, silver has fallen about 15 percent. The $650 million
investment represented about a quarter of the world's annual
output.
The company at the end of 1997 also owned $4.6 billion in
zero-coupon bonds and contracts on 14 million barrels of oil.
Those investments were unusual because Buffett, 68, made his name
buying stocks.
The letter lists Berkshire's stockholdings valued at $750
million or more as of Dec. 31. Investors closely follow Buffett's
views on individual stocks and the financial markets because of
his success.
Still, his reported positions may be misleading.
Berkshire said in a 1997 letter to the U.S. Securities and
Exchange Commission that by the time the world learns about
Berkshire's holdings, Buffett may have long since changed course.
Buffett takes advantage of rules that let the company keep some
of those filings secret for at least 12 months.
Tough Year for Stocks
Overall, 1998 was a tough year for his stock picks, Buffett
said.
''Several of the public companies in which we have major
investments experienced significant operating shortfalls that
neither they nor I anticipated early in the year,'' Buffett
wrote. ''Consequently, our equity portfolio did not perform
nearly as well as did the S&P 500.''
That didn't hurt the performance of Berkshire's own shares,
which returned 52 percent last year vs. 29 percent for the S&P
500. Berkshire shares have lagged the benchmark index in only
four years since 1965, when Buffett took control of the company,
according to analyst Alice Schroeder of PaineWebber Inc.
Buffett said his portfolio changes last year hurt his
returns. ''In particular, my decision to sell McDonald's was a
very big mistake,'' he wrote. ''Overall, you would have been
better off last year if I had regularly snuck off to the movies
during market hours.''
Shares of McDonald's Corp., the world's largest restaurant
company, returned 62 percent last year. In the 1997 annual
report, the stock dropped from his list of top holdings, so it's
unclear how big a stake he had left in 1998.
Shareholdings
Of Buffett's largest holdings, American Express returned 16
percent, his $13.4 billion chunk of Coca-Cola Co. returned 1.3
percent and Gillette Co. lost 3.9 percent.
Buffett's letter contained no comments on the stock market
in general. He said this month on ABC's ''Nightline'' that
valuations remain ''high by historic standards.''
At the end of 1997, Berkshire Hathaway owned 23.7 million
shares of Travelers Group Inc., the insurer and owner of
investment bank Salomon Smith Barney Inc. Travelers and Citicorp
merged in October to form Citigroup. Travelers holders exchanged
each of their shares for one share in the new company, which
would have given Buffett a Citigroup stake valued at $1.56
billion at Friday's closing price.
Citigroup was absent from the list of stockholdings of $750
million or more. In 1998, Citigroup shares fell 7.7 percent.
Also, Berkshire's stake in American Express rose to 50.5
million shares from 49.5 million, while Freddie Mac dropped to
60.3 million from 63.9 million.
Berkshire said it owned 51.2 million Walt Disney shares as
of Dec. 31, down from 64.5 million shares a year ago, taking into
account a 3-for-1 stock split in July.
Berkshire last year reported that it held a Wells Fargo
stake with an initial cost of $412.6 million, though this year
that number had been trimmed to a stake with an initial cost of
$392 million. The actual number of shares Berkshire held was
inflated by Wells Fargo's merger with Norwest Corp.
Cash on Hand
Buffett said, as he has in past letters, that he and Vice
Chairman Charles Munger are having a hard time finding stocks to
invest in. He is one of the best-known ''value'' investors, those
who seek to buy stocks when they are temporarily out of favor or
selling at low price-to-earnings ratios.
Given the size of Berkshire Hathaway, the company must buy
big blocks of stock for an investment to make an appreciable
impact on the company.
Berkshire Hathaway had plenty of cash on hand to invest
with: More than $15 billion in cash as of Dec. 31, up from $9
billion in September.
''Charlie and I will continue our search for large equity
investments or, better yet, a really major business acquisition
that would absorb our liquid assets,'' Buffett wrote.
''Currently, however, we see nothing on the horizon.''
General Re
Some of that cash resulted from Berkshire Hathaway's
purchase of General Re Corp. in December for $16 billion. General
Re is the largest U.S. reinsurer, covering other insurers against
losses in return for a portions of their premiums.
Buffett said he asked General Re to sell its investments in
250 stocks once he was confident the merger would go through, a
''clean sweep'' that allowed Buffett and Munger to make their own
investing decisions. The tax bill alone on the stock sales was
$935 million, he said.
General Re and Berkshire Hathaway's other insurance
operations, including Kansas Bankers Surety and National
Indemnity, provide a steady stream of premiums for Buffett to
invest until the insurers must make payments to satisfy claims.
That premium stream is known as ''float,'' and its growth
may be modest in coming years because the market for reinsurance
''is soft,'' Buffett wrote. General Re now accounts for two-
thirds of Berkshire's float, he said.
Buffett became the world's second richest man by purchasing
and holding multibillion dollar stakes in a few stocks, such as
Coca-Cola, American Express and Gillette.
According to the letter, his holdings in Coca-Cola, Gillette
and the Washington Post Co. -- all valued at more than $750
million -- remain unchanged from the previous year.
Berkshire also owns many businesses outright, including
Dairy Queen, the Buffalo News and jewelry retailer Borsheim's.
The company's other big purchase last year beside General Re was
the $725 million acquisition of closely held Executive Jet Inc.,
which offers time-sharing in corporate jets.
An investment of $10,000 in Berkshire Hathaway in 1965 would
have been valued at $51 million on Dec. 31, compared with
$132,990 if the money had been invested in the Standard & Poor's
500 Index, according to PaineWebber's Schroeder.
Berkshire Hathaway Class A shares are up 15 percent this
year; they rose 4,900 to 80,300 yesterday. The Class B shares,
which represent 1/30th of an A share, are up 12 percent; they
rose 139 to 2,642 yesterday.
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