greed...now FEAR!
Headline: Billionaire investor Buffett cautious on stock prices
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By Kevin Drawbaugh
CHICAGO, March 14 (Reuters) - Billionaire investor Warren
Buffett said Saturday that Berkshire Hathaway Inc., the giant
holding company he manages, continues to sell stock, but he
hedged on pronouncing stock markets over-valued.
In his closely watched annual letter to shareholders,
Buffett said that Berkshire last year sold common stock
holdings equal to five percent of its portfolio value.
"Some of the sales we made during 1997 were aimed at
changing our bond-stock ratio moderately in response to the
relative values that we saw in each market, a realignment we
have continued in 1998," Buffett wrote in the letter.
He added, "There is no reason to think of stocks as
generally over-valued" -- as long as interest rates hold steady
or decline and corporate returns on equity remain high.
Noting that rates have fallen since he offered the same
opinion a year ago, Buffett added, "Returns on equity are not a
sure thing to remain at, or even near, their present levels."
Last year, stocks fell on the Monday after the weekend
release of Buffett's annual letter, in which he said "virtually
all stocks" were too high and that markets were "over-heated."
Since then, the Dow Jones Industrial Average has risen 24
percent, continuing a history-making bull market.
"We have a very cheery consensus," Buffett wrote in this
year's letter. "That does not necessarily mean this is the
wrong time to buy stocks ... Today's price levels, though, have
materially eroded the 'margin of safety.'"
The so-called Oracle of Omaha runs a mammoth business with
stakes in Coca-Cola Co. (NYSE:KO), Gillette Co. (NYSE:G), Wells Fargo
and Co. (NYSE:WFC), Washington Post Co. (NYSE:WPO), and other
blue-chip corporations. Berkshire also owns GEICO Corp., the
seventh-largest U.S. auto insurer, as well as companies that
sell furniture, candy, shoes and jewelry.
Net earnings were $1.5 billion on revenues of $10.4 billion
last year for Omaha, Nebraska-based Berkshire, compared to net
earnings of $2.1 billion on revenues of $10.5 billion in 1996.
Two of Berkshire's most troubled recent investments have
been in Salomon Brothers, the Wall Street brokerage and
investment bank, and the commercial airline USAir.
"At times, the ... two had me mouthing a line from a
country song: 'How can I miss you if you won't go away,'"
Buffett wrote in his customarily tongue-in-cheek style.
After recovering from a bond trading scandal in 1991,
Salomon was acquired last year by Travelers Group Inc. (NYSE:TRV)
and merged with Smith Barney, paying Buffett an estimated $1.5
billion on an initial 1987 investment of $700 million.
"Berkshire's final results from its Salomon investment
won't be tallied for some time, but it is safe to say that they
will be far better than anticipated two years ago," he wrote.
On the Salomon ordeal, Buffett said, "For a time I felt
like the drama critic who wrote: 'I would have enjoyed the play
except that I had an unfortunate seat. It faced the stage.'"
USAir, recently renamed US Airways Group Inc (NYSE:U), has
also bounced back from near disaster, last month disclosing a
new financial plan pledging to buy back $358 million in
preferred stock held by Buffett. "It is now almost certain that
our US Airways shares will produce a decent profit -- that is,
if my cost for Maalox is excluded," Buffett wrote.
Berkshire realized major gains on long-term investments
made cheaply in market downturns in the 1970s and 1980s, but
has found few new comparable opportunities, Buffett said.
"Berkshire continually looks for ways to sensibly deploy
capital, but it may be some time before we find opportunities
that get us truly excited," he wrote, adding that one exception
is Berkshire's insurance business. "GEICO is flying and we
expect that it will continue to do so," he said.
At the same time, he counseled caution for the auto
insurance business: "GEICO is not the only auto insurer
obtaining favorable results these days ... Intensified
competition will soon squeeze margins very significantly."
Buffett said he expects Berkshire's rate of progress in
investments and operations to decline in the future.
"Our 1997 operating earnings were much better than we
anticipated and also more than we expect for 1998," he wrote.
Discussing Berkshire's investment alternatives, Buffett
said prices for stocks and businesses are high.
"That does not mean that the prices of either will fall --
we have absolutely no view on that matter -- but it does mean
that we get relatively little in prospective earnings when we
commit fresh money," he said. "In this market ... undervalued
acquirees are almost impossible to find."
Berkshire last year acquired International Dairy Queen, the
U.S. purveyor of fast food and frozen custard. Buffett said
that he and Berkshire vice chairman Charles Munger bring some
expertise to Dairy Queen as regular customers.
"We have put our money where our mouth is," he said.
chicago.equities.newsroom@reuters.com))
Copyright 1998, Reuters News Service |
