Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc, is taking lumps in the stock market.
Berkshire's four biggest investments in publicly traded companies -- American Express Co, Coca-Cola Co, Gillette Co, and Wells Fargo & Co -- are down an average 24 percent this year.
USG Corp, the No. 1 US wallboard maker, filed for bankruptcy protection in June because of asbestos lawsuits just months after Berkshire became its biggest shareholder.
The decline in those holdings illustrates why Buffett prefers to buy companies outright. Direct ownership helps avoid surprises such as the US$1 billion of junk-bond losses at American Express in the first half. It also gives him greater say over the businesses.
"He's keen to buy 100 percent of good businesses, not some smaller percentage," said Eugene Toombs, chief executive of MiTek Inc, a Missouri-based maker of roofing components Berkshire bought in June for US$378 million. "It gives him better control."
On Friday Berkshire said second-quarter profit before realized gains and losses rose 44 percent from a year earlier to US$353 million, or US$231 a share, buoyed by higher prices on policies at the company's car insurance business. Insurance and reinsurance account for more than half of Berkshire's revenue.
Berkshire shares declined 3 percent this year compared to the 9 percent decline in the Standard & Poor's 500 Index. They fell US$1,050 on Friday to US$68,800.
It won't be clear if Buffett sold or added to Berkshire's largest stock holdings until a filing with the Securities and Exchange Commission later this month. Meantime, Buffett is spending to bolster his operating companies and buy new ones after last year spending US$8 billion on eight purchases of makers of bricks, boots, paint and insulation. He's already spent more than $3 billion on acquisitions this year.
Buffett, who turns 71 at the end of the month, earned a US$100,000 salary from Berkshire the past three years. His 36 percent stake in the company makes him the world's second-richest man, worth US$32.3 billion, according to Forbes magazine. Bill Gates, Microsoft Corp's co-founder, is the wealthiest.
"There's no question his stocks are doing crummy," said Andy Kilpatrick, a Berkshire investor who also wrote Of Permanent Value, the Story of Warren Buffett.
"His real appetite right now is wholly owned companies. He can get a hold of them, influence management and dictate things a bit." With the Securities and Exchange Commission rules that prevents companies from disclosing material information to big investors before telling all of them, Buffett may not get the same responsiveness from publicly held firms as he does from ones he owns.
American Express, for instance, was barred from telling Buffett early last month that it would take an US$826 million pretax charge in the second quarter for junk-bond losses.
Berkshire held 11.5 percent of American Express, or 151 million shares, at the end of March. The largest charge card issuer's stock is the second-worst performer in the Dow Jones Industrial Average this year, declining 27.5 percent.
For Berkshire, that's a loss on paper of US$2.4 billion, although the stake is still worth more than four times Berkshire's cost to acquire it, according to Berkshire's annual report.
"With American Express, the question is, was it just a bad decision or a good decision with unlucky results?" said Lawrence Cunningham, a law professor at Benjamin Cardozo School of Law.
"When he owns a company outright the manager is working just for him and he has a far greater voice."
MidAmerican Energy Holdings Co, a Des Moines, Iowa-based energy company owned by Berkshire, earlier this week agreed to buy Innogy Holdings Plc's power-distribution network in northern England in an asset swap valued at US$1.43 billion. A week before, Berkshire bought Xtra Corp, a Westport, Connecticut-based container-leasing company, for about US$1.3 billion in cash.
MiTek's Toombs called Buffett directly after reading about his purchase criteria in Berkshire's annual report. Buffett gives his phone number in the report and promises to respond "customarily within five minutes."
"It was a done deal almost as fast as advertised," said Toombs, who doesn't plan any big changes as part of Berkshire.
That's not to say Buffett holds his tongue when he can prevent a management goof.
Coke dropped its bid for Quaker Oats Co last year partly because Buffett said the price was too high. Buffett in October announced the ouster of Gillette's then-Chief Executive Michael Hawley after 18 months on the job. Gillette in January said it would no longer provide earnings projections at the request of its board, a move endorsed by Buffett. "It's a mistake, it leads people to stretch accounting," Buffett said at Berkshire's annual meeting in May.
While known for long-term investments, Buffett has shown he doesn't stick with some stocks forever. Last year he sold nearly all of Berkshire's 8.50 percent stake of Freddie Mac and his undisclosed holding of Fannie Mae, the nation's two largest buyers of mortgages.
Others that had been top holdings and are no longer: Walt Disney Co and McDonald's Corp. Stocks likely to never be jettisoned from Berkshire's holdings -- Gillette, Coca-Cola and Washington Post Co. That's partly because Buffett serves on their board of directors.
There's another reason Buffett may not be buying stocks -- because they're still not bargains. Even after declining 10 percent this year, the Standard & Poor's Corp's average price to earnings is 33 times, compared to the average of price-to-earnings ratio of 8.47 for the five publicly traded companies Berkshire bought last year.
"Buffett has a double-barrel approach to investing, the public and private side," said Cunningham. "On the private side, valuations are still far more attractive than the public side. That barrel is cooling right now."
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