Warren Buffett acknowledged on Saturday that his Berkshire Hathaway Inc would probably lose money on some of the derivatives contracts that have prompted some to speculate that the world’s most famous investor has lost his touch.
At Berkshire’s annual shareholder meeting, Buffett offered a gloomy forecast for parts of the US economy and Berkshire itself, though he said massive federal efforts to stimulate activity could pay off at a possible cost of higher inflation.
“It has been a very extraordinary year,” Buffett said. “When the American public pulls back the way they have, the government does need to step in ... It is the right thing to do, but it won’t be a free ride.”
PHOTO: BLOOMBERG
The meeting attracted a record 35,000 people to the Qwest Center in downtown Omaha to see the world’s second-richest person, often considered the world’s greatest investor.
But it had a decidedly more serious and somber tone from years past as many investors expressed worries about the economy, Berkshire’s investments, and how long the 78-year-old Buffett plans to stay on the job.
Buffett said housing prices have yet to stabilize broadly, that retailers may be under pressure for a “considerable period of time,” and that he would not buy most US newspaper companies “at any price.”
He also said that in insurance, which comprises about half of Berkshire’s operations, the earnings power “was not as good last year as normal” and “won’t be as good this year.”
Buffett also said the four candidates to replace him as Berkshire’s chief investment officer failed to outperform the Standard & Poor’s 500 last year, but remained confident they could perform well over time. Berkshire still has three internal candidates to replace Buffett as chief executive.
Berkshire’s stock has fallen 39 percent since December 2007, and profit last year fell 62 percent from a year earlier. Buffett said he would not buy back Berkshire stock now, because its share price was not “demonstrably below” the company’s intrinsic value.
Buffett had transformed Berkshire since 1965 from a failing textile maker into a conglomerate with close to 80 businesses that sell such things as Geico car insurance, paint, ice cream and underwear. It also has tens of billions of dollars of investments.
Much of the worry about Berkshire has focused on Buffett’s use of derivatives in making long-term bets on the direction of stocks and junk bonds, and which have so far resulted in billions of dollars of paper losses.
While Buffett still expects the contracts tied to equity stock indexes to make money, he said “we have run into far more bankruptcies in the last year than is normal.”
He said he now expects the contracts tied to credit defaults will show a loss before investment income and perhaps after as well.
Buffett still distinguishes his derivatives from others such as credit default swaps, given that he collects billions of dollars of premiums upfront to invest and posts little collateral.
He called other derivatives “a danger to the system. There is no question about that.”
The more serious mood extended to the traditional movie made by Buffett’s daughter Susie, which dispensed with its usual humorous cartoon, though it showed Buffett attempting to teach Tiger Woods how to improve his golf game.
Buffett expressed confidence in Wells Fargo & Co, one of Berkshire’s biggest investments, saying it has “by far the best competitive position” of any large US bank.
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