The micro view: This morning, I highlighted that Warren Buffett's Berkshire Hathaway (NYSE:BRK-B) had virtually eliminated its positions in Johnson & Johnson (NYSE:JNJ) and General Electric (NYSE:GE). I expressed some surprise, because both companies fit the mold of Berkshire's long-term equity holdings and, at first glance, their valuations still appear to offer a margin of safety. (GE shares trade at less than twelve-and-a-half times the estimate for the next twelve months' earnings per share.) In October 2008, for example, Buffett praised GE, calling it "the backbone of American industry," before adding:
They're going to be around five or 10 or 100 years from now. If you buy at the right time, you'll probably make some money.
It now appears that he, himself, bought at the wrong time, and ended up losing money.
Berkshire acquired the GE shares in the first quarter of 2006, during which time their average closing dividend-adjusted closing price was $26.42. If we compare that to the average closing price last quarter of $20.94, it would appear that Berkshire (and its shareholders) took approximately a one-fifth haircut on the investment, for an annualized loss of (3.5%); over the same period, the S&P 500 managed to eke out an annualized gain of roughly 3%.
Still, it's worth remembering that the GE position was relatively small relative to Berkshire's equity portfolio. Furthermore, Buffett made much more money on GE in the interim -- by investing $3 billion in General preferred shares -- in order to shore up confidence in the company in October 2008, at the height of the credit crisis. The preferreds paid a 10% dividend, so the $300 million annual dividend payment was larger than Berkshire's entire GE common stock position.
Furthermore, Berkshire received warrants to purchase $3 billion in GE common stock with a $22.25 exercise price and a five-year expiration. GE's stock price only exceeded that exercise price for the first time in mid-September, which suggests that, even though the warrants were icing on the cake, Buffett may have underestimated the magnitude and duration of the credit crisis's impact on stock prices.
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Alex Dumortier, CFA has no positions in the stocks mentioned above; you can follow him @longrunreturns. The Motley Fool owns shares of Berkshire Hathaway, General Electric Company, and Johnson & Johnson. Motley Fool newsletter services recommend Berkshire Hathaway and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.