Berkshire Hathaway Is Raking It In

Clarifying why he boldly declared "Warren Buffett is an idiot" earlier this year, CNBC contributor Dennis Gartman explained:

I think Mr. Buffett made some terrible mistakes last year ... The fact that Mr. Buffett was down, what, 45%, that Berkshire was down 45%, and that not enough action was taken to mitigate those losses, I thought was disconcerting and poor trading ... when you're down 45% for a year, I'm sorry, that's inexcusable.

Interesting ... and kinda stupid
Mind you, Buffett has spent the better part of a lifetime belittling "traders," comparing them to those who engage in one-night stands and call themselves romantics. And while Berkshire's stock may have been down an "inexcusable" 45% in 2008, its book value declined a more modest 9.6%, outperforming the S&P 500 by the seventh-largest margin ever.

Gartman's claim is based on logic that made him look like -- to be fair here -- a big idiot.

But further defending Buffett is in order. And not because it's cool to bow at his feet and assume he can do no wrong, but because some of Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) investments made over the past year have already raked in billions of dollars in profits and gains.

Exhibit A
A big factor fueling Berkshire's 2008 decline was a series of equity puts it sold over the past several years. If global markets so much as stayed at then-current levels between 2019 and 2028, Berkshire could have been on the hook for tens of billions of dollars in losses (although it received nearly $5 billion in premiums up front, which it could invest to offset potential losses -- the initial deal wasn't that bad for Berkshire to begin with). 

But as my Foolish colleague Anand Chokkavelu noted, a hedging oddity allowed Buffett to quietly renegotiate some of these contracts without exchanging a penny. In one example, the strike price on S&P 500 puts was cut from about 1,500 down to the high 900s. In return, the expiration date dropped from 18 years out to 10 years out.

With the S&P 500 now above 1,000, those equity puts are now "out of the money." For the contracts to cost Berkshire one penny, the S&P 500 would have to be lower than it is today 10 years from now. That could happen, but it's not the kind of risk investors need to get queasy over. The new terms are far more favorable for Berkshire investors than the old ones were -- and it didn't cost them one dime.

Exhibit B
Criticism flew after Goldman Sachs (NYSE: GS  ) and General Electric (NYSE: GE  ) plunged following Buffett's investments in the two companies last fall.

But these jeers were irrational. Berkshire didn't buy common shares, but preferred stock yielding 10%, which came with a bundle of free warrants to boot. Better yet, the common shares tied to these warrants have rebounded, racking up gains.

Berkshire's investment in Goldman Sachs, for example, is now worth more than $9 billion, according to Linus Wilson of the University of Louisiana. That's $4 billion or so more than it paid last October.

Amazingly, Goldman's surge places it as one of Berkshire's top investments in public companies:

Company

Current Value of Berkshire Holding*

Coca-Cola (NYSE: KO  )

$9.9 billion

Wells Fargo (NYSE: WFC  )

$7.8 billion

Procter & Gamble (NYSE: PG  )

$5.4 billion

*Using shares owned as of March 31, 2009, and share price as of Aug. 3, 2009.

The General Electric warrants haven't been as prosperous -- shares currently trade for less than the warrant's strike price -- but more than four years remain for things to pan out before they expire. Ditto for the Goldman warrants, of which Buffett recently explained, "Every instinct in my body tells me that we will want to hold those warrants until they're very close to their expiration date."

In the meantime, the preferred shares pay a combined $800 million a year in dividends. Not bad for two investments made over a few casual phone calls.

Exhibit C
Diverting from a famous avoidance of all things technology, Berkshire plowed $230 million into a Chinese battery and electric car company called BYD last fall.

In the months since, BYD shares have surged fivefold, leaving Berkshire with a $1 billion paper profit. Adding to the allure of long-term potential here, co-chairman Charlie Munger recently went out on a limb, saying BYD's founder and CEO is "likely to be one of the most important business people who ever lived," comparing him to a cross between Thomas Edison and Jack Welch.

BYD hopes to sell 700,000 cars in 2010. That's more than four times what it sold in 2008.

Moving on
"Idiot" is a relative term. Berkshire, in some eyes, is making some of the shrewdest and most promising investments it's ever made. When you couple that to a stock trading well below its historical premium to book value, things haven't look this bright for Berkshire investors in a long time.                                                                                           

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Fool contributor Morgan Housel owns shares of Berkshire Hathaway and Procter & Gamble, as does The Motley Fool. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Berkshire Hathaway and Coca-Cola are Motley Fool Inside Value recommendations. Coca-Cola and Procter & Gamble are Motley Fool Income Investor selections. The Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (100)

Comments from our Foolish Readers

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  • Report this Comment On August 04, 2009, at 12:42 PM, weiwentg wrote:

    Spot on!

  • Report this Comment On August 04, 2009, at 1:01 PM, MrDoopysDad wrote:

    As a BRK.B owner since '97, it's been a fascinating experience. Buffett is his own worst critic, and has been for years. He gets slammed quite regularly by dim bulbs in the world of finance and it's important to stay detached emotionally from the noise. He's the greatest, but nobody's perfect. The one thing anyone who's interested should read is his "Owner's Manual". He never wavers from the principals he set down on that thing.

    I think I'll do OK with him and imagine his successors will be quite capable as well. But a roller coaster stock price experience is in the cards for anyone who rides with the King.

  • Report this Comment On August 04, 2009, at 3:30 PM, plange01 wrote:

    berkshire is nearly 50% off last years high.they are no where near breaking even....

  • Report this Comment On August 04, 2009, at 4:38 PM, rationalwalk wrote:

    When did Berkshire trade at $200,000 last year?

  • Report this Comment On August 04, 2009, at 5:08 PM, x1x2x3x4444 wrote:

    I have wondered about this: If I remember correctly, in Buffet's now-famed-column in the NYTimes (WSJ?, whichever) last year, he said he had been sitting with his entire personal account in government securities for some time before last Fall's meltdown. Yet, Berkshire was invested heavily in stocks. If he really felt a large decline was in the offing, should Berkshire have sold more of its holdings before the collapse? The company obviously hedged its bets and etc. but... still....

  • Report this Comment On August 04, 2009, at 5:09 PM, MrDoopysDad wrote:

    Oh, the joy!

  • Report this Comment On August 04, 2009, at 5:54 PM, NonnoDoug wrote:

    Like Mr. Buffett, I am happy when the stock of an excellent business "goes on sale", even when that company is BRK. Then, I can buy more on the cheap.

    Meanwhile, I'll leave the deal making to WB as he continues to add value to our company. The critics can carp all they want while we long-term investors enjoy life. Right on, Warren

  • Report this Comment On August 04, 2009, at 6:11 PM, memoandstitch wrote:

    I would buy GE's 9.9% preferred shares. Too bad Immelt didn't call me. Being popular and having 5 billions at one's disposal does make one look smart.

  • Report this Comment On August 04, 2009, at 7:46 PM, greenwave3 wrote:

    Getting out of Moody's will prove to be Buffett's best decision this year. For some reason, people are still buying it, but the negative forces are building up and MCO will not hold.

  • Report this Comment On August 04, 2009, at 9:26 PM, noblepaladin wrote:

    Buffett had been sitting on a lot of cash. Sure Berkshire's stock portfolio has gone down big, but people forget that stock isn't all of Berkshire's holdings. Also, Buffett cannot control Berkshire's stock price, he can only control it's intrinsic value or it's book value. If people are willing to pay ridiculous premiums to own Berkshire, then there is a danger that one day it will collapse big in price even if Berkshire keeps on making money.

    These reporters just want to get attention by bad mouthing Buffett. But they are the ones who are proven to be idiots in the long run. CNBC loves to tell people that they are wrong (ex: "You bears have missed this 40% move!"), but the truth is nobody can get it right all the time. If you can, you'd be richer than Buffett in one year. There are millions of new stock prices every day, millions of different bets you can make. All you have to do is to make one good bet each year. You can miss the top, miss the bottom, miss the pop, miss the drop, etc. But if you find that one bet that is low risk, high reward and you capture one of them each year, you'll easily beat the SP500. That is what Buffett does so well.

    Buffett misses the top, misses the bottom, makes mistakes, but he doesn't lose any money if he doesn't swing the bat. When he swings, it turns out to be a home run hit (like the Goldman preferred+warrants or the BYD +400% gain). You can be wrong 99 times out of 100, but if you bet that one time you are right, you win. Buffett usually doesn't bet unless he is certain he is right.

  • Report this Comment On August 04, 2009, at 9:41 PM, marei wrote:

    Allow me to put in a word for dollar cost averaging and the use of index mutual funds. I've used both techniques for many years and even in the depths of this recession found my faith tested but not lost in the financial throes of this horrific two year downturn. Now I get to continue watching my investments ride the crest of all those discounted stock shares to even greater heights that they've enjoyed before. They say that the chief trait of courage is persistence. Warren Buffett, good for you!!--Tom Reilly

  • Report this Comment On August 05, 2009, at 10:51 AM, plange01 wrote:

    berkshire is just raking up some of last year losses like everyone else and is no where its high..some big gainers like gs and some huge losers like cop.

  • Report this Comment On August 05, 2009, at 1:31 PM, plange01 wrote:

    this spring when most great stocks were on sale its odd that the most famous value investor of all did so little buying.it appears that some of his cash machines like now failing geico and general re let him down at the worse possible time..

  • Report this Comment On August 06, 2009, at 5:13 PM, deepestvalue wrote:

    WEB ( Warren Edward Buffett) speaking of the founder of BYD said " Charlie said he reminded one of Ben Franklin;I did not move;then he said ...of Henry Ford;I did not budge; Then Charlie said --BILL GATES-- and I said --Get me in"

    WEB does not touch technology nor startups probably because of high rates of failure; WEB saw something in BYD which made the chances of failure real low; UP A BILLION SO FAR !!!!

  • Report this Comment On August 07, 2009, at 1:51 PM, SeeknDestry wrote:

    Blaming Buffet for the price of Berkshire stock falling is idiotic. Nobody can control the whims of the market, but they can control when they act.

    As with every time before, I believe Buffet has made the move most would hesitate to make. That is what makes him such a great investor. Having the stones to go against the market sentiment in order to reap the rewards in the long run.

  • Report this Comment On August 07, 2009, at 2:48 PM, Gregeph wrote:

    It's astounding that people continue to doubt Buffett's investing acumen after putting together such a great track record. Sure it's tougher to make money when you already have a market cap over $100 billion, but Buffett continues to prove his critics wrong. I believe studying his letters and past pruchases is one of the best ways to learn to invest. On my blog, I write about how Eddie Lampert reversed Buffett's past pruchases to learn how to invest. http://valueinvestingfundamentals.blogspot.com/search/label/...

  • Report this Comment On August 07, 2009, at 3:49 PM, WMesser58 wrote:

    Well say what you want but, until you have Warren Buffetts problems of having to much money.

    I'm not real concerned about what you think of him.

    Btw, why not talk about something productive instead of destructive.

    If you are that much better than him SHOW ME THE MONEY

    Otherwise continue whinning because you really have nothing to contribute.

  • Report this Comment On August 07, 2009, at 3:53 PM, TMFHousel wrote:

    WMesser58,

    I'm curious: Did you actually read the article?

  • Report this Comment On August 07, 2009, at 3:55 PM, WMesser58 wrote:

    Ah Yes I did.

    Great comeback though. Btw I have no need to debate anything with you.

    You win.

  • Report this Comment On August 07, 2009, at 3:58 PM, TMFHousel wrote:

    In fairness then, what part of the article was "destructive," or "whining?" And where do I claim to be better than Buffett?

  • Report this Comment On August 07, 2009, at 4:05 PM, WMesser58 wrote:

    I like that you read your comments. I have to retract my thoughts about you because, I read the first part about what you stated Dennis Gartman had actually said.

    I focused on the negative words in your article not taking a moment to realize you were merely paraphrasing Gartman.

    I do sincerely apologize.

    Respectfully,

    Wayne

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