Even Buffet’s Berkshire Hathaway Finds Itself in Bear Market

By | July 14, 2008

It’s a bear market for Warren Buffett’s Berkshire Hathaway Inc., too.

The shares of the billionaire’s insurance and investment company have dropped more than 20 percent from their most recent peak, the first time that has happened since February 2003.

A 20 percent decline is a traditional sign of a bear market in stocks. The Nasdaq went through that level on Feb 6, the Dow Jones industrial average on July 2 and the Standard & Poor’s 500 on July 9.

Berkshire Class A shares had through Friday fallen 22.5 percent from their Dec. 11, 2007 record high of $151,650. In Monday afternoon trading, they fell another $1,650 to $115,850. Class B shares trade at about 1/30th of the Class A price.

“It makes a lot of sense for this to happen,” said Vahan Janjigian, the author of “Even Buffett Isn’t Perfect,” in an interview.

“Insurance makes up the bulk of Berkshire profits, and they can’t command the premiums they had in the recent past,” he continued. “I think it’s even good news that Berkshire stock is down only 20 percent. When you compare it with Citigroup, Fannie Mae, Freddie Mac or other large financial companies, Berkshire is actually doing quite well.”

Berkshire was not immediately available for comment.

At Berkshire’s May 3 annual meeting in Omaha, Nebraska, Buffett said there was “absolutely no question” the company’s returns would decline. Shareholders who expected performance to replicate the past should sell their stock, he said.

Berkshire generates about half its profits from insurance. The Standard & Poor’s insurance index had through Friday fallen 32 percent since Dec. 11.

Buffett owns about 27 percent of Berkshire, whose market value was about $182 billion Friday. Forbes magazine in March called him the world’s richest person. Buffett, 77, is gradually donating much of his net worth to charity.

Berkshire owns some 76 business that sell such things as car insurance, carpeting, corporate jet leases, ice cream, manufactured homes, paint and underwear.

It also ended March with some $111 billion of stock and bond investments, including in such brand-name companies as American Express Co, Coca-Cola Co, Procter & Gamble Co and Wells Fargo & Co.


Many stock holdings have lost value as equity markets declined. On Monday, the shares of M&T Bank Corp, in which Berkshire has reported a 6.1 percent stake, fell to a 7-1/2-year low after the mid-Atlantic regional bank said credit losses contributed to a 25 percent drop in quarterly profit.

And yet, Berkshire has become something of a banker, ready to finance transactions as tight capital markets make it harder to get mergers and acquisitions done.

Last week, Buffett put up $3 billion to help finance Dow Chemical Co’spurchase of rival Rohm and Haas Co . And in April, he committed $6.5 billion to help Mars Inc buy chewing gum maker Wm Wrigley Jr Co.

Berkshire ended March with $35.6 billion of cash and has long held “triple-A” credit ratings. Its new municipal bond insurance unit is also winning business after rivals MBIA Inc and Ambac Financial Group Inc faltered by insuring securities linked to soured subprime mortgages.

“This is actually an environment good for Berkshire,” said Thomas Russo, a principal at Gardner, Russo & Gardner in Lancaster, Pennsylvania, a Berkshire shareholder. “Given the liquidity it enjoys, it is in the fortunate position of having opportunities rather than burdens.”

Buffett has long told shareholders to ignore short-term performance bumps. He has also projected volatile quarterly results because of derivatives contracts designed to make Berkshire money over the long term if stock indexes rise and junk bonds stay out of default.

In May, Buffett traveled to Europe to scout out investment opportunities, including acquisitions. Janjigian expects him to use current market travails as an opportunity to make acquisitions or buy big stakes in established companies.

“You can bet that, given the weakness in the stock market, we’ll see a lot more news coming from Berkshire,” he added.

(Editing by Andre Grenon)

Topics Berkshire Hathaway

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